The right form of legal business structure for your business depends on factors such as the business activity and its financial implications. Each legal form of business has risks and benefits. A sole proprietorship or a partnership is easy to form and operate. These forms require no statutory procedures to form and operate except for the permits and licenses necessary to operate business in your state. Sole proprietorship and partnership are ideal for businesses which does not involve personal risk and potential financial liabilities. The personal liability of a proprietor or partner (s) is unlimited towards business obligations or debts. If a claim or liability arises out of the business, your personal assets are in jeopardy.
Limited Liability Company or Corporation offers limited personal liability protection to its business owners. There are statutory procedures required to be complied with to form LLC or Corporation. State laws govern the formation and operation and each state may have different requirements. For forming a LLC or Corporation you have to consult the state agency handling incorporations and organizations. Usually business incorporations are handled by the Secretary of State or Corporation Commissioner’s offices. All states provide online information regarding incorporation or LLC formation and personal support over telephone or in person.
For forming a LLC in any state, the basic requirement is to file an article of organisation and pay the filing fees. You require a valid name to form LLC. Make sure that the name is not similar to another business in your state. Some states provide name availability check option and you may check on the internet also. The name as stated in the articles should end with ‘Limited Liability Company’, ‘LLC’ or another abbreviation which clearly states the limited liability status of the business. The articles of organisation must state all the critical information about the LLC members and the purpose for which it is formed. The articles should also state a person or entity as a registered agent with a local street address for process service. Some states may have more requirements for forming LLC. An LLC operating agreement is required as a part of articles by some states. Even if the operating agreement is not a legal necessity, it is advisable to have one for your LLC. It will provide your LLC a separate identity and establish the limited liability status firmly in the eyes of law. Publication of the intent to form the LLC is also a legal requirement in some states. Some states prohibit formation of LLC for business like banking, insurance or professions.
Incorporation is no more a mystery and the domain of lawyers. The common man is very well equipped to handle matters such as incorporation or organization of a business. Thanks to our public friendly state administrations. All states have provided online resources for business registrations with clear instructions on how to proceed. You may contact the state agency handling business registrations over phone or in person also to clear you doubts. You may check with your state agency whether corporate seals are legally binding in your state.
A legal business structure is imperative in operating a business in any of the states. Some forms of business do not involve many legal or statutory formalities in formation and its operations. Sole Proprietorships and General Partnerships can be formed by simple intent of the principal(s). However you will need to obtain all the obligatory permits and licences to operate the business. Forming a Limited Liability Company or a Corporation entails formal procedures. The organisation of LLC or the incorporation of a corporation is governed by state statute. These rules and regulations vary in each state. For forming a LLC you have to select a name and file an Articles of Organization with the state agency handling business registrations and pay a filing fee. Some states have a few more requirements for forming LLC such as filing an LLC Operating Agreement and publication of the intent to form LLC.
Forming a corporation involves lengthier procedures than forming a LLC. A corporation has a separate legal entity from that of its business owners, formally termed as share holders. The corporation is constituted by units of stocks or shares which each share holder subscribes to and promise to pay for. The basic charter for operating business as a corporation is its Articles of Incorporation. The promoters or incorporators have to provide all critical information on the purpose of formation and the organizational structure as required by the state. There are two types of corporations, C Corp and S Corp.
Taxation formalities in each of the business form vary. The sole proprietorship is considered as having no individual existence or a ‘disregarded entity’ and the business owner files business tax returns along with personal returns. Partnerships have a similar system where the profits or loss from business is declared proportionately through partner’s personal tax filing. Partnership has to file an information return separately. LLCs or S Corps has a pass through taxation system as that of a partnership. Corporations are taxed directly and have to file separate tax and information returns.
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.
You need a legal business structure to start and operate a business. There are a few legal structures allowed by state laws for you to form and do your business with. All forms have their advantages and disadvantages. You may adopt a form that is suitable your business. If you operate business with low risks and potential liabilities you may adopt a sole proprietorship or a partnership if you wish to conduct the business jointly with another person or persons. The advantage of a proprietorship or partnership is they are easy and inexpensive to form and operate. The disadvantage is business owners liability is unlimited in these legal business structures.
If you are planning to start a business that may entail considerable debts and business risks, you have to protect your personal assets from getting drawn into the business. Corporations and Limited Liability companies limit business owner’s personal liability to a predetermined amount, usually the capital contribution. The business owners of a corporation are ‘share holders’ and that of LLC ‘members’. When compared to LLC, Corporations are more expensive to form and laborious to maintain. The Formalities and procedures for forming a LLC is simple and straight forward. These depend on the state law in which you wish to register your LLC. Contact the state agency handling LLC applications to know the correct formalities and procedures for forming a LLC in your state.
To start a LLC you have to select a name first. Name availability can be checked with the state business registry or other databases. You should not choose a name that is identical or deceptively similar to that of an existing business. If you do that you may be sued under the Trade Mark and Patent laws and end up paying damages. Once the name availability is confirmed, you have to file certain documents and pay fees for filing and registration. Each state has its own requirements for forming LLC. The basic document to be filed is Articles of Organization or Certificate of Organization. This document must contain all essential information about your LLC such as the proposed name and the address of the registered office of the business, the name and addresses of the initial members and resident agent of the LLC, general purpose of forming the LLC and the membership interests. Some states require that an LLC Operating Agreement also be filed along with the Articles and a public notice issued regarding the intent to form LLC.
If you are already operating a business as a sole owner and are wondering whether you need a proper legal structure for your expanding business, consider these. The recognized business structures are Sole Proprietorships, General or limited partnerships, C or S corporations and Limited Liability Companies. All these business structures have their inbuilt pros and cons. Adopting an appropriate legal structure for your business depends on many factors. The first step is to understand your business needs. If you are operating a small business without many risks or potential liabilities, a sole proprietorship is the most commonly used structure. If the business is run jointly by one or more persons, a general partnership will be suitable. Both these business structures are easy to form and operate and there are hardly any legal or statutory formalities to comply with except for employment and income tax filings.
If your business volume and activities are considerable, you need a sophisticated business structure. The Corporations (Inc.) and Limited Liability Companies (llc) are designed for conducting business with limited risks to the business owners. In a sole proprietorship or general partnership, the business owner’s personal risks are unlimited. The business owners and their personal properties are fully liable to settle business debts and obligations. Whereas, by forming a LLC or a Corporation, you limit your personal liability in business obligations. Corporations are generally used for medium or large scale businesses which involves high turnover and associated risks. Forming a corporation and maintaining it is comparatively expensive than other forms of business structure.
If you are a small business but has considerable risks or potential liabilities associated with your business forming an llc is the most appropriate thing to do. By forming an llc, you limit your personal liability for business obligations to a present amount. The legal and statutory formalities for forming an llc are simple and easy. Formation of Limited Liability Companies and Corporations are governed by state laws. The rules and regulations governing business may differ from state to state. The business registrations are usually handled by the Secretary of State’s office. You have to file an Articles of Organization stating the basic information of you and your business and pay a filing fee. Information required to be included in the Articles may vary in each state. Then you have to adopt a operating agreement for the LLC. The operating agreement helps in clearly stating the LLC’s business policies which will also provide a separate existence to the entity and the status of your limited liability. One of the best features of an LLC is the llc taxation. You can elect to be taxed as a partnership or a corporation as you wish or which is beneficial to you.
The series LLC is the newest business entity form that has been created. A series LLC is based on the concept that a single business entity can be formed in any state, but a separate series can be internally created inside the LLC. The series LLC was created by the State of Delaware over nine years ago, and is slowly being adopted by other states. Currently the only other states that recognize a series LLC is Iowa, Illinois, Oklahoma, and Nevada. The series LLC is slowly gaining more popularity as more states are becoming aware of what it is and how it works.
Forming a LLC is as simple as filing out the appropriate paperwork and filing it with the LLC filing office in your state. If your state recognizes series LLCs you will need to go through the same LLC application process. The difference is once you have started the main LLC you will need to go about forming a LLC for each separate entity. You need to start a LLC for each separate entity so that each entity has separate liability protection, the series LLC is designed to protect each entity from any debts and liabilities that are incurred by the other entities.
The series LLC allows you to form LLC entities that are protected from each other, the protection that each separate entity receives is the same protection that a regular LLC would receive. In order to get this protection you will have to start a separate LLC for each entity. The best way to describe a series LLC is to compare it to a corporation that has several subsidiaries. With the subsidiaries, each one has its own protection from the other; the parental corporation is not responsible for its business debts and liabilities. To ensure protection from one another you want to make sure that each entity has its own bank account and any contracts, deeds, notes, etc should be signed in the name of the series that it is for.
One of the biggest drawbacks to forming a series LLC is that there are costs and administrative burdens that go along with forming and maintaining each separate LLC. For example, you will have to file articles of organization for each LLC you form underneath the main LLC. You will also have to prepare the articles of organization for each separate LLC. Despite the additional fees and forms, you have to fill out when forming each separate LLC the process for adding and deleting each series is not very complicated. To add a series you need to amend the Series’ “limited liability company agreement,” this is the same thing as an operating agreement for LLCs. To delete a series you simply need to have a majority or 2/3 approval of ownership interest, depending on what is in the operating agreement.
The biggest problem that series LLCs face is taxes because of how new they are. The tax treatment of a series LLC has not been firmly established by the IRS. Currently Series LLC classification is determined independently. Each series is evaluated and classified on its own. For example, if Series A has one member it can be classified as a sole proprietorship for tax purposes, if Series B has two members it can be classified as a partnership for tax purposes. Some states only tax the series that are doing business in their states, others tax all of the series the same.
