Why Should I Create an Operating Agreement?
While doing business keeping your personal life separate from your business is very important. This will help you gauge the success of your business and give a better perspective to your customers. Business cards and letterheads are a part of this. There several types of legal business structures you can adopt depending on your business. If you are doing business on your own, you automatically become a sole proprietorship in the eyes of law whether you report it or not. If you do business under a fictitious name and have advertised or recorded it any legal manner such as to protect it as a trademark, you are presumed of operating you sole proprietor ship under that name. Likewise, if are jointly operating with two or more persons, you become a partnership whether or not you have written in down in an agreement. You have to report the operations to the Federal and State in an information return form. The issue with these forms is that the business does not have a separate legal existence. The sole proprietor or partners are wholly liable to settle all business debts and obligations.
To protect your personal assets from business liabilities or obligations, you should adopt a legal business structure that provides personal liability protection to business owners. The common forms in use are Corporations and Limited Liability Companies. Both forms limit the personal liability of business owners to the capital contribution and all other business debts or obligations do not cross over except in certain circumstances. Forming a LLC or Corporation requires compliance of formal procedures with state government. Corporations re structured by units of shares and shareholders subscribe to particular number of units. Corporations have a separate legal existence and are perpetual in its continuity. A Limited Liability Company is formed by one or more persons by filing an Articles of Organization in accordance with the state rules and regulation governing such formation. For forming an LLC some states insist on filing the LLC Operating Agreement along with the Articles.
In Taxation rules, the corporation is treated as a person and has to file all the necessary returns stipulated by the revenue codes. The Corporation is taxed directly on its profits. When these profits are distributed among shareholders they have to declare that as income and pay tax on it if application. There exists another type of corporation, which is not subjected to this double taxation, a S Corp. In an S Corp or LLC the profits pass through to the shareholders or members and is declared and taxes paid through personal tax returns.
