ASK LAWYERS the Legal Guide

Choosing an Entity for Your Company

Legal Article Guide

By: 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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