Choosing an Entity for Your Company
The entities to choose from are:
- Sole Proprietorships
- General partnerships
- Limited partnerships
- C and S corporations
- Trusts, and
- Limited liability companies
The factors that affect the choice of entities are:
- income tax and asset protection consequences
- ease and cost of formation
- number of owners
- restrictions on ownership
- privacy, control, management
- owners’ protection from liabilities of the entity
Limited Liability Company Formation
- Protect personal assets and income
- Limit liability to the assets of the company
- Separate your business and personal assets and liabilities
- Create an entity in perpetuity
Benefits of a limited liability company All the protection of a corporation without:
- Annual meetings or minutes
- Annual reports or annual fees
- Stock to classify and issue
And with
- Less expense to form
- Less government oversight
- Members’ liability limited to their share of LLC’s capital
- Creditors and judgment creditors cannot collect from personal assets
- Unlimited members unless S corporation election; then limit is 100 members
- Disproportionate distribution to members
- PLLC only requires one member who can also be manager
LLC Formation
- Reserve unique name
- Name must include the letters LLC
- Licensed professionals must use PLLC
- Prepare and file Articles of Organization
- Appoint Statutory agent
- Choice of taxation
- Choice of manager
- Choice of number of members
- Choice of member responsibilities
- Open LLC bank account
- Set up separate books for company
- Obtain Corporate Commission approval of articles
- Publish articles
- File Affidavit of Publication
- Obtain federal and state tax ID numbers
- Obtain state and local sales tax licenses, if needed
- Prepare operating agreement
Operating Agreement
- Required by lenders, plus personal guaranty
- Required for multi-member LLCs
- Avoids disagreements about company’s operation and management, capital requirements, profit sharing, member responsibilities, management
- Sets up methods of dispute resolution
- Sets up how capital is raised and profits distributed
Major Provisions of Operating Agreement
- Rules for admitting new members
- Rules to terminate members’ interests
- Rules about member withdrawal
- Rules about transfer of company interests
- Right of first refusal on transfers
- Rules for allocation of profits and losses
- Rules for member contributions
- Rules about the company’s right to incur debt and loan to members
An LLC can be taxed four ways Note: All tax questions should be referred to a tax professional
- As a separate legal entity
- As a partnership
- As an S corporation
- As a C corporation
Note: Most states follow the IRS in imposing taxes
An LLC can be taxed as a partnership or an S corporation by which the taxes pass through the company and are taxed to the individual owners of the LLC at their individual tax rates. Indigo Business Solutions can provide you with the legal guidance to help you choose the right entity for your company.
For more information about these and other important topics and for legal consultation, please visit our website at http://IndigoBusinessSolutions.
Copyright 2006. Indigo Business Solutions is a registered trade name.
Jo Ann Joy is the CEO and owner of Indigo Business Solutions. She has a law degree and an MBA, and an undergraduate degree in Economics. Her background includes commercial and real estate law, accounting, financial planning, mortgages, marketing, product development, budgeting, sales and banking. She ran a successful business for 10 years, and she has written and given presentations on various business subjects.
About the Author
Rating: Not yet rated