Choosing an Entity for Your Company
Legal Article GuideBy: Jo Ann Joy
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.
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