Legal Structure
Registration
There are four basic
forms of business organization: sole proprietorship, partnership, Limited
Liability Company and corporation. There are many modifications and variations
within these forms, but the key to selection revolves around the concept of
liability and taxation. In choosing your business structure, consult with both
a qualified accountant and attorney who are familiar with your resources and
objectives. A description of the forms of organization follows:
Sole Proprietorship
A sole proprietorship
is a business owned and operated by one person. It is simple to organize and
the initial start-up costs are usually less than other forms of organization.
The owner is entitled to all profits but assumes all risks and is liable for
all debt. Under this form, personal assets may be confiscated to pay business
debts.
Partnership
A general partnership
is a business owned and operated by two or more persons. Unless limited by
terms of the partnership agreement, action of one partner obligates all
partners. Each partner is responsible for 100 percent of all debts unless
limited by preparing the partnership agreement. While a partnership can be
formed by an oral agreement, the assistance of a lawyer is strongly recommended
in preparing a written partnership agreement. Partners share all profits and
are responsible for all losses as stated in the partnership agreement
.
Limited Partnership
A limited partnership
is one in which the partners have limited personal liability. It allows
investors, who are not actively involved in the operations of the business to
be partners without the risk of unlimited liability that exists in a general
partnership. A limited partner risks only his/her investment but must allow one
or more general partners to exercise control over the business. If the limited
partner becomes involved in the partnership’s operations, he/she may lose his
or her protected status as a limited partner. The general partners in a limited
partnership are fully liable for the partnership’s debts. Every limited
partnership must have one or more general partners as well as one or more
limited partners. Filing a “Certificate of Limited Partnership” with the
Secretary of State is required.
Limited Liability
Company
A limited liability
company (LLC) is an organization formed under the law of the state. The people
who participate in and run an LLC are generally known as “members.” In a
partnership they would be equivalent to partners. Unlike a partnership
however, the members
have no personal liability for what another member of the LLC does or for what
the LLC itself does. Members of the company can be actively involved in the management
of the business, but they are shielded from liabilities. A LLC is not a
corporation, partnership or trust, but has corporate-like liability protection
for the owners and partnership-like flexibility in capital and management
structure.
Any person may form a
LLC company by signing and filing Articles of Organization with the Secretary
of State’s office. Creating a LLC generally requires the assistance of a lawyer
who has studied this type of business organization and who can shape the LLC to
meet the needs of the owners. LLCs must be properly structured and maintained
for their members to be taxed as if they were a partnership or a corporation
.
Corporation
A Corporation is a
legal entity established and operated under jurisdiction of a state upon
meeting certain statutory requirements established by state law. The
Corporation is liable for all debt. Owners are entitled to all profits of the
corporation, but debt liability is limited to the amount of equity the owners
have invested in the corporation. The owners of a corporation are the
stockholders. To become incorporated, a business must file Articles of
Incorporation with the Secretary of State. The advantages of a corporation are
that the life of the business is perpetual and stockholders have limited
liability. Corporations are subject to special taxation and are more difficult
and expensive to organize than other forms of ownership. Corporate charters
usually restrict the type of business activities and corporations are subject
to many state and federal controls. Corporations must: file articles of
incorporation; adopt a set of bylaws; observe corporate formalities on a
regular basis such as election of directors; obtain an Employer ID Number even
if there are no employees; file required state and federal estimated tax
quarterly; file an annual report and pay annual fee to continue corporation.
Subchapter S
Corporation
A Subchapter S provides
the legal protection of a corporation, but for tax purposes, the income or loss
is passed on to the shareholders in proportion to their ownership. It is
important to note that to be recognized as a Subchapter S, the corporation must
apply to their local authority managing this program. To elect an “S” status, a
corporation must meet the following requirements:
1) Be a domestic
corporation.
2) Have only one class
of stock.
3) Have no more than
100 stockholders.
4) Operate on a
calendar tax year or have a business purpose for adopting a fiscal year.
5) Have only
individuals and their estates and certain trusts as shareholders.
6) All shareholders
must be citizens or residents.
7) It must not be a
member of an affiliated group of corporations
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