Every business has some or other financial implications during its tenure. The appropriate legal form of business depends on the degree or severity of these implications. Sole proprietorship or partnership is easy to form and operate but the personal risk of the business owner (s) in operating these forms is unlimited. When the transactions and risks involved in a business is considerable, it is necessary to choose a form that provides protection from unlimited personal liability. Corporations and Limited Liability Companies offer the personal liability protection to its business owners.
If the primary objective of the business form is personal liability protection, LLC form will serve the purpose. Forming LLC or Corporation needs certain legal formalities to be complied with. However, corporations are high maintenance business forms. Unless the business owners do not foresee considerable growth or intend to take the business to the public, forming and maintaining a corporation is not worth the hassle. Another plus for forming LLC is in LLC Taxation. Corporations have to file an individual tax return as a legal entity or ‘person’ and pay state and federal taxes directly. Again, when the profits are distributed as dividend among the shareholders, they have to declare it as personal income and pay tax. Sort of double taxation. The members, as the business owners of an LLC is called, can elect to be taxed as sole proprietorship, partnership or even a corporation, whichever is most beneficial to them.
How to LLC formation, the state laws regulate the formation and operation of LLCs. Each state has different rules and procedures for incorporation or organization of an LLC. Refer to your state LLC regulations to understand the requirements for forming and operating LLC. In all states one basic requirement is filing the Articles of organization. The nomenclature may change in each state but the purpose is the same. An available valid name has to be chosen for your LLC. Then file the articles of organization in that name and provide all the information in the articles as required by the state. You need a person or entity with a local address to act as your registered agent and that person’s written consent to act so must be provided. Some states stipulate an Operating Agreement duly executed and signed by the proposed members as a part of the business registration process. Even otherwise, an operating agreement is beneficial to the business in many ways. It will provide clarity to business’s operational and organizational structure and a separate identity from that of the members. A publication of the intent to form the LLC may be required in some states.
Forming a corporation requires compliance with state laws and regulations. Incorporation formalities and regulations vary in each state. Refer to your state’s laws and regulations for forming a corporation. Basically all states require articles of incorporation to be filed with the state authority dealing with business registrations. In some states it is called a Certificate of Incorporation or Charter. The articles or certificate of incorporation must contain all the critical information regarding the promoters and purpose of the corporation. An article or certificate typically contain
- Name of the Corporation.
The proposed corporation’s name is the first article. The name must not be identical or closely resembling an existing business name in the state. You may have to consult multiple databases to ensure this. States maintain business registers of all registered names and trademarks. The name must include a term such as ‘Company’ or ‘Corporation’ or abbreviations suggested by the state laws.
- Registered Address.
The corporation must have a local address as it registered office or principal place of business
- Duration:
Some corporations may be formed for specific purpose and duration. Generally corporations are “perpetual”
- Business purpose.
The purpose for which the corporation is formed, the business it proposes to conduct. You may state that “all lawful business permitted by state law”. There are some restrictions on the types of business a corporation can engage in.
- Authorized Capital:
The number and class of shares the corporation is authorized to issue and the par value of a share should be stated.
- Registered agent:
The Corporation should have a registered agent with a local address for process serving and his consent to act as registered agent should be included.
- Name and Addresses of Incorporators.
- Name and Addresses of Directors
The above articles may not be in the same sequence in every state and some states may require more or less articles from the above. For example, Connecticut state certificate of incorporation require that the class of shares and it specifics like voting rights, transferability etc be stated. DC requires that the business articles be stated in detail. Publication of notice of intent to incorporate is part of some states incorporation requirement.
Limited Liability Companies or LLCs also provide personal liability protection to business owners. Forming LLC also requires legal and procedural formalities to be complied with. In an LLC, the charter to operate is in the form of Articles or Certificate of Organisation which will state the purpose and essential information about the promoters. Some states require a LLC operating agreement to be filed with the state.
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.
Limited Liability Companies or LLCs are suitable for small businesses with considerable business volumes. The limited liability of the business owner in an LLC protects personal assets from business obligations. Unless your business involves cross border transactions or you are planning to go public, there are few advantages in forming and operating your business as a corporation. LLC’s can operate like a corporation with the flexibility of a partnership. Business continuity can also be ensured if the members of the LLC choose to do so. The Operating agreement can structure the memberships in such manner as to be easily transferable.
Don’t get excited by the advertisements about the Delaware or Nevada corporations. Those are for the big corporations with muscle and money. Even if you set up an out of State Corporation, you will have to qualify to do business in your state. This entails additional expenses and you do not get the tax benefits you angled for with an out of state Corporation. Register LLC in your hometown and avoid a lot of hassles involved in out of state Corporations. Forming LLC in most states is quite simple. States encourage small business registrations and have simplified procedures for LLC formation. Check with the state department that deals with business registrations in your state on how to form an LLC. Generally business registrations are handled by the Secretary of State’s or Corporations Commissioner’s offices. Detailed instructions are available on all State websites.
State statutes govern the LLC formation. Rules and regulations and formalities may differ in each state. In all states the LLC needs a name to operate under.
Care should be exercised while choosing a name. The LLC name cannot be identical or deceptively resemble the name of an existing business. Databases and registries are available with states or on the internet and can be freely accessed to check the name availability.
The basic requirement in all states to register LLC is to file an Articles of Organization. Some states have additional requirements such as filing the LLC Operating Agreement and issuing a public notice about the intent to form LLC. A fee has to be paid in all states to register LLC, which vary in each state. The Articles or Organization should contain all essential information regarding the purpose and organization of the LLC. The Operating Agreement is imperative to the proper functioning of the LLC and to provide it with individuality from that of its members.
Choosing an appropriate business structure is important for many reasons. The business structure should provide flexibility in operations and limit personal liability as well. Limited Liability Companies or LLC’s are best suited for small business operations that demand flexibility in operations. LLC’s limits the personal liability of business owners like in a Corporation but offers flexibility in management as that of a general partnership or sole proprietorship. Corporations are comparatively expensive to form and operate and the procedures and formalities in its operation are quite cumbersome. Partnership and sole proprietorship offers flexibility but the proprietors and partners have unlimited liability in the business. A proprietor or partner is wholly responsible for all business transactions and obligations and their personal assets have no protection from business defaults. LLC’s provides advantage of limited personal liability and flexibility of operations.
How to form an llc depend on the state statute where you wish to register your llc. Formalities and procedures for forming an llc and operating it may vary in each state. Usually the business registrations are dealt with by the Secretary of State or Corporations commissioner’s office. Check with your state’s agency dealing with llc registrations to get proper understanding on how to form an llc. Forming llc is not difficult and does not involve many formalities so that you have to consult a professional or a lawyer. You can do it yourself if you apply some brains and effort. The general formalities and procedures for forming llc are easy and not too complicated. All states are out to attract business to their territory and will be most helpful in registering your llc.
The basic requirement in forming an llc in most states is to file an Articles of Organisation. The document will contain all the essential information regarding your proposed business. You have to select a name for your llc which is not identical or similar to that of an existing business. All states maintain a business or corporations register which you can check to ensure that the name you selected is not already in use. The name should contain the words Limited Liability Company or an abbreviation that clearly demonstrates the limited liability status of the business. The Articles of Organisation is usually available in a pre-printed format with blanks for required information. You fill in the blanks, sign as the organizer, pay the filing fees and your llc is in business. An operating agreement is advisable even if you are a single member llc. The operating agreement will provide individuality to the llc and clearly state its limited liability status.
Presenting gifts are conventional ways of strengthening bonds and in business it is an accepted norm to present gifts to clients. Corporate business gifts with your company logo or name will act as a reminder to your client about your existence. Ensure that the gifts are not too costly or conspicuous and not given with intent of influencing business decisions. Bribery is considered as corrupt business practice and is illegal. A corporation is expected to have business ethics, which is similar to that of government gifts and ethics policy. By forming a corporation the promoters are obligated to subscribe to social and moral policies that are prevalent and considered ethical in the business community.
Forming a corporation involves legal and statutory formalities also. By definition a corporate is a legal entity as that of person. It has to abide by the rules of the society and the constitution like any ordinary citizen. The promoters of a corporation create the legal entity by fulfilling legal requirements of the state in which the entity is incorporated. The corporation, after becoming legal entity functions through its board of directors and operates through its office bearers. The Articles of Incorporation states the purpose for which the entity was created and its organizational structure.
Corporations are incorporated under state law and regulations. Rules and regulations that govern corporations may differ in each state. If you intend to incorporate a company in any of the states, corporate kits will come in quite handy. These corporate kits contain all that is necessary to be filed or put in place by a new corporation. Make sure that you order state specific corporate kits as not to miss out on any of the rules or regulations of that state.
As opposed to forming a corporation, forming llc is less cumbersome. Limited Liability Company is comparatively easy to form and manage. It has the advantage of the limited personal liability of its owners as that of a corporation but does not involve too many formalities like recording minutes or mandatory board meetings etc. Another advantage is that the LLC can elect to be taxed according to it convenience. By default, a single member LLC is treated as a Sole Proprietorship and multi member LLC as a partnership for taxation purposes. However, the owners have the choice to be taxed as a C corporation or even an S Corporation if the LLC meets certain criteria.
The limited liability company formation does not allow you to form a LLC corp. The reason for this is that an LLC is a separate business structure. The LLC is a hybrid of a partnership and a corporation. When you are forming a LLC, you are choosing the LLC business structure because it provides you with the taxation benefits of a partnership, but provides you with the protection of a corporation.
The closet that you can come to forming LLC corporations is choosing to have your LLC taxed like a corporation. By choosing to have your LLC taxed like a corporation, you will be receiving the protection that is available to corporations and receiving the same tax benefits that corporations receive, but your business will be an LLC instead of a corporation.
One of the benefits of forming your LLC this way is that it saves you time on paperwork, but it can also save you money. Forming a corporation is more expensive than forming an LLC because of the filing fees and the amount of paperwork that has to be filed. With an LLC, the only paperwork that you have to file is your articles of organization, which usually costs around $100 to file. With a corporation, you will need to file articles of incorporation, bylaws, and numerous other forms. You can use sample articles of incorporation to help prepare your articles of organization so your LLC is similar to a corporation instead of a partnership.
When forming LLC corporations you will need to decide if you want to run your LLC as a C corporation or an S corporation. The structure for both is quite similar, but there are some differences that you will need to keep in mind. Choosing the S corporation for tax purposes allows you to benefit from pass through taxation, where as a C Corporation suffers from double taxation. The double taxation is why some people prefer to form an LLC, they can choose to have their LLC taxed like a corporation, but still benefit from the protection that are provided to corporations.
LLC businesses are protected in a way that is similar to the corporate veil. This means that the LLC member’s personal assets are protected, just like shareholder’s assets are protected in corporations. Protecting the personal assets of members offers the members protection from any business debts and liabilities that are incurred by the business. If the personal asset protection wasn’t available then creditors could come after the members’ house or car to help settle any business debts or liabilities. The one thing that you need to remember is that a personal protection that is offered to LLCs and corporations is not iron clad. The protection is considered null and void if any personal guarantee is signed on behalf of the business.
When it comes to forming LLC corporations, one choice you have to make is where you will be forming your corporation. While most people will choose forming LLC corporations in the state that they live in, others choose NJ incorporation because of the benefits it provides. Incorporating in a state like NJ offers you the chance to incorporate your business in a business friendly state. For example, NJ does not have the extra annual tax that other states charge when forming an LLC.
