While operating a business it is advisable to have a legal form for many reasons. Essentially your business should have a separate identity from that of your person to keep things in perspective. The business operations, its success or failure can be effectively monitored. Moreover, keeping a separate book of accounts will help in filing yearly tax returns. Formation and operation of legal business forms are governed by state statutes.
The legal forms for operating a for-profit business are Sole Proprietorship, Partnership, Corporations and Limited Liability Company. Each legal form has its risks and benefits. Sole Proprietorship is suitable for an individual operating a business without a great deal of risks or potential liabilities. If you are jointly operating a business with two or more persons, partnership is suitable. Both these forms of business are simple to form and easy to operate. The inherent risk in proprietorship or partnership is that the business owners are personally liable for all business debts.
Limited Liability Company or LLC and Corporation offer limited liability protection to business owners. They are not personally liable for the business’s debts or obligations. Forming a LLC or a Corporation requires compliance with state laws. To set up an LLC or a Corporation you have to file certain documents with the state as required by the state statute and pay a filing fee. You may have to pay a regular yearly fee to the state for the maintenance of these business entities.
Corporation has a separate legal existence from that of its share holders. In the eye of law, corporations are ‘persons’ and are treated as such. Due to the separate legal entity status, the office bearers of the corporation are obliged to conduct the business operations strictly in accordance with the regulations governing corporations. LLC has comparatively more flexibility in business operations. While it has the personal liability protection as in a corporation, it offers the flexibility and taxation benefits of a partnership or sole proprietorship.
How to form an LLC depends on the state in which it is registered. Rules and regulations on how to LLC vary in each state. The basic requirement in all states is to file articles or a certificate of organization and pay a filing fee. Some states require an operating agreement and publication of the intent to form a LLC additionally to that of the articles. LLC is not a tax classification in the Revenue Code. LLC’s can elect to be taxed as any of the other tax classifications which is convenient and beneficial to its business owners.
