The Law Offices of Robert J. Delaney- Business Options

 

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Introduction

 

There are a variety of legal entities in which we are able to conduct our business activities.  Primary considerations are:

1.      Protecting owner from liability

2.      Taxability

3.      Ease of transferring ownership rights

4.      Ease of continuing business after death of majority owner or key employee minority owner

5.      Withdrawal of one or more owners

Let’s take a look at the most common business structures:

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Sole Proprietorship

The single owner of the business is a sole proprietor.  The single owner has sole control and responsibility.  The sole proprietorship is easily formed, allows important decisions to be made quickly and may enjoy fewer legal restrictions. Responsibilities include:

  • Procuring all capital

  • Personal liability for all claims against the business

  • Showing business profits as part of the owner’s individual taxable income.

  • Obtaining local business licenses.

  • Registering the name of the business with the appropriate state agency.

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General Partnership

A partnership is an association of two or more people acting as co-owners of a business for profit.  A partnership can be created by an oral or written contract between the individuals.  It is wise to have an attorney draw up a partnership agreement specifying rights and obligations of the partners.  Almost any management and profit-sharing agreement can be arranged.  A general partnership:

  • Requires no official registration beyond that required for a sole proprietorship

  • Extends liability to the personal assets of the business partners

  • Is required to file with the Internal Revenue Service and appropriate state agency

  • Shares its profits and losses among the partners.  Each partner is then taxed at personal income tax rates.

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Limited Partnership

Limited partnerships are more closely regulated than general partnerships, permitting investors to become silent or limited partners without assuming unlimited liability.  There must be at least one general partner who manages the business with one or more limited partners whose liability is limited to the extent of their investment.  In a limited partnership:

  •  General partners share full liability.

  •  Limited partners may take no part in running the business.

  • The limited partnership is created by filing documents with the appropriate state agency.

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Regular or C or Business Corporation

 

A corporation is a more complex form of business organization.  A corporation is a legal entity and exists apart from its owners or shareholders.  As a separate entity, it has its own rights, privileges and liabilities apart from the individuals.  A business corporation:

  • Must file its Articles of Incorporation with the appropriate state agency.

  • It has limited liability.  The liability of shareholders (or owners) to creditors is ordinarily limited to the amount of each shareholder’s capital stock investment.

  • Is unaffected in its continuity by death or transfer of shares by any of the owners.

  • Requires more extensive recordkeeping.

  • Pays taxes on its profits.  Taxes on dividends are paid by its shareholders.

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Sub S or S Corporation

The S Corporation combines parts of the corporate and partnership forms of business organization.  The Internal Revenue Code permits a privately held corporation, one with up to 75 shareholders, to avoid corporate taxation by having each shareholder report the share of corporate income on his or her individual income tax return.  The S Corporation:

  • Generally does not pay itself.  However, there are two situations which may result in tax to the corporation:

  • 1.  Excess net passive income

  • 2.  Tax on certain capital gains

  • Remains a corporation in the view of the state and complies with state corporation regulations.

  • Must have only one class of stock.

  • Uses a calendar tax year or shows a business purpose for adopting a fiscal year.

  • Must have the consent of all shareholders to having S Corporations status.

  • Must be made up of shareholders that are individuals, estates, or trusts, but not corporations.

  • Can only have shareholders that are United States citizens or residents.

  • Cannot be a member of an affiliated group of corporations.  Also ineligible are most financial institutions, insurance companies and domestic international sales corporations.

  • Taxes shareholders at the corporate level if any shareholders are non-state residents.

  • Prohibits certain types of income and business activities.

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Not for Profit Corporation

The not for profit corporation enjoys freedom from taxation.  Certain religious and charitable entities qualify for this status.  Status is obtained by completing a very lengthy form and process and is granted, if successful, by the IRS.

A not for profit corporation:

  • Must file its Articles of Incorporation with the appropriate state agency (Indiana Secretary of State)

  • Must file for tax exempt status with IRS, Department of the Treasury.

  • Is taxed only on enterprises or property unrelated to not for profit purpose.

  • Has limited liability.  The liability of officers and members is ordinarily limited to the amount of assets in the corporation.

  • Requires regular and requested filing of reports with governmental entities to maintain status.

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Professional Corporation

 

A professional corporation may only be organized for the purpose of furnishing one specific type of professional service and the ancillary services associated with that profession.

  • Unlike traditional business corporations, no individual may be an officer, director or shareholder of a professional corporation who has not been licensed to practice the same profession as that for which the professional corporation was formed.  However, an unlicensed person or non-professional may serve as either the secretary or treasurer of the professional corporation.

  • Another distinctive feature of the professional corporation is that shares of the corporate stock may only be issued to persons who are licensed to render the specific professional service.  Likewise, a shareholder may voluntarily transfer his shares in a professional corporation only to those persons who are duly licensed to render the same professional service as that for which the corporation was organized.

  • Articles of Incorporation for a professional corporation must be filed with the appropriate state agency.

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Limited Liability Company (LLC)

The Limited Liability Company combines the advantages of a corporation’s limited ability and the flexibility and single taxation of a general partnership.  An LLC has members rather than shareholders and is run under what is called an “Operating Agreement,” which is like a partnership.

  • Must file its organization Articles with the appropriate state agency.

  • Liability of members is ordinarily limited to assets of LLC.

  • Taxes members at personal income tax rates.  No taxes on LLC profits, unlike C Corporation.

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Limited Liability Partnership (LLP)

The Limited Liability Partnership limits the liability for many of LLP’s debts and liabilities unlike a general partnership where each partner is responsible for all of the partnership’s debt and liabilities.

  • Must file its organization Articles with the appropriate state agency.

  • Liability of partners limited to the extent of their investment (unlike general partnership) and assets of LLP.

  • Income to partner is taxed same as in general partnership.

Which entity fits your objective best?  I’ll be happy to discuss that with you.  Your accountant will need to be involved in the decision at some point re the tax ramifications of your decision.

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