A Limited Liability Company (LLC) is a relatively new type of legal structure. It has only been in the last 15 to twenty years that states have enacted statutes that allow the formation of this type of entity. At present, all states allow the formation of LLCs, though the laws vary from state to state.
An LLC is comparable to a Corporation in that it gives its members liability protection. But unlike a corporation, an LLC does not impose double taxation. Members of a Limited Liability Company have the same tax treatment as a partnership.
Other advantages of an LLC are that it is flexible to operate, and it doesn’t have as many levels of administration as a corporation. For example, an LLC does not have a board of directors; it is managed by all the members, or by one manager chosen by the members. It is important to note, though, that the formation of both entities is very much alike, and it is done with authority of the Secretary of State.
In an LLC members can be foreign nationals without losing the tax treatment similar to a partnership; this is not the case with an “S” corporation.
Some of the drawbacks are: In some states, such as California, professionals cannot form an LLC. In California in particular, anyone who must be licensed under the Business and Professions Code cannot form an LLC. This includes; not only Doctors, Lawyers, Dentists; but also contractors, real estate agents, and many other types of businesses. Another disadvantage is that it is not as easy for a member of an LLC to sell his or her interest in the company because ownership in an LLC is not as universally recognized as ownership of shares of stock in a corporation. Still another disadvantage is that in many states there must be at least two members to an LLC, though this is not the case in all states.
These are only some of the advantages and disadvantages of an LLC. If you are interested in forming one, consult your attorney, as the statutes and requirements vary greatly from state to state. Still, it is well worth taking a close look into this type of entity because of its flexibility and relative ease of management.
Showing posts with label Business Legal Structure. Show all posts
Showing posts with label Business Legal Structure. Show all posts
Thursday, November 8, 2007
Tuesday, November 6, 2007
Legal Structure of a Business: Corporation
A corporation, unlike a sole ownership or partnership, is a legal entity that is separate and distinct from the individual owners/shareholders. This type of entity is complex, and can only be formed with the authority of the Secretary of State or the Government of your state.
Once a corporation is formed, the shareholders must apply for a Tax Identification number, as well as licenses and permits, in the name of the corporation.
There are several advantages to forming a corporation. The first one is that because the corporation and the owners are distinct, the owners are not personally liable for the debts of the corporation. It is also a more stable business structure because the corporation doesn’t end when the owners die. It is also easier to transfer ownership by selling shares of the business.
Additionally, it is not as difficult to obtain financing because lenders feel more confident in the stability of the corporation. There is depth of skills and talents, since the business can draw upon the experiences of the shareholders and directors of the corporation.
But the disadvantages can sometimes scare off business owners who might consider this type of entity. First, there is quite a bit of government control in the formation and management of the company. There are many requirements, such as holding regular meetings, and drafting minutes of those meetings. The tax filing requirements are considerably more complex than those for sole proprietorships and partnerships. There is double taxation, as the corporation pays taxes, and the shareholders pay taxes as well. Also, in many states there is a minimum tax that a corporation must pay. Additionally it is more expensive to form and manage this type of entity because of the many requirements.
In order to avoid double taxation many corporations elect to be a subchapter “S” corporation. In this case the corporation is taxed as a partnership, so the corporation itself does not pay taxes. But a subchapter “S” corporation cannot have more than 35 shareholders, nor can any of the shareholders be foreign nationals. Additionally, if the corporation offers benefits to its employees, such as health insurance and 401K programs, the shareholders often cannot participate, depending on their percentage of ownership in the company.
These are some of the advantages and disadvantages of forming a Corporation. If you are interested in this type of entity, make sure that you consult your lawyer so that she can fully explain the requirements in your state as well as at the federal level.
Once a corporation is formed, the shareholders must apply for a Tax Identification number, as well as licenses and permits, in the name of the corporation.
There are several advantages to forming a corporation. The first one is that because the corporation and the owners are distinct, the owners are not personally liable for the debts of the corporation. It is also a more stable business structure because the corporation doesn’t end when the owners die. It is also easier to transfer ownership by selling shares of the business.
Additionally, it is not as difficult to obtain financing because lenders feel more confident in the stability of the corporation. There is depth of skills and talents, since the business can draw upon the experiences of the shareholders and directors of the corporation.
But the disadvantages can sometimes scare off business owners who might consider this type of entity. First, there is quite a bit of government control in the formation and management of the company. There are many requirements, such as holding regular meetings, and drafting minutes of those meetings. The tax filing requirements are considerably more complex than those for sole proprietorships and partnerships. There is double taxation, as the corporation pays taxes, and the shareholders pay taxes as well. Also, in many states there is a minimum tax that a corporation must pay. Additionally it is more expensive to form and manage this type of entity because of the many requirements.
In order to avoid double taxation many corporations elect to be a subchapter “S” corporation. In this case the corporation is taxed as a partnership, so the corporation itself does not pay taxes. But a subchapter “S” corporation cannot have more than 35 shareholders, nor can any of the shareholders be foreign nationals. Additionally, if the corporation offers benefits to its employees, such as health insurance and 401K programs, the shareholders often cannot participate, depending on their percentage of ownership in the company.
These are some of the advantages and disadvantages of forming a Corporation. If you are interested in this type of entity, make sure that you consult your lawyer so that she can fully explain the requirements in your state as well as at the federal level.
Monday, November 5, 2007
Legal Structure of a Business: Partnership
A partnership is a business that is owned and operated by more than one person. Often two or more friends find out that they have similar passion for a particular product or service, and they decide to form an alliance. As with a sole proprietorship, it is relatively easy to form a partnership. There are no major requirements to form this type of entity.
But the fact that there are no legal requirements doesn’t mean that it is advisable to be informal and nonchalant about this type of business ownership. It is prudent and very wise to have a written partnership agreement because it can prevent, or at least minimize, headaches down the road.
A partnership agreement will spell out who will contribute what, and how much of it; how the business will be managed, under what circumstances someone else can join the partnership, as well as how the partnership will be dissolved if and when the time comes.
Some advantages of a partnership are: it is easy to start, given that there are fewer legal formalities than starting a corporation or LLC; there is flexibility, though not as much as with a sole proprietorship; there is depth of experience and perspective, as there are several owner with various talents, skills, and points of view. There is also more ability to obtain capital, since there is more than one person to contribute money to the enterprise. Additionally, there are tax benefits; as the profits will be go directly to the partners and become the partners personal tax liability.
But, as with almost everything in life, there are disadvantages to this type of business ownership. The main one is that in a general partnership, each partner has unlimited liability for the debts of the business. Many believe that each partner is responsible according to the percentage of ownership, but this is not the case. Each partner is wholly responsible for everything. Another drawback is that there isn’t much stability because the illness or death of a partner can severely affect the business. It is also difficult for a partner to sell his or her share of the business because the other partners may not have the capital to buy him out at the time that he wants to sell, and they may not be willing to have that share of the business go to someone they do not know nor feel comfortable with, so the options are limited. And, if a partner dies, the other partners may resist giving the heirs of the deceased partner much say or control, with ensuing tension.
If you are considering this type of business ownership, it is imperative that you consult an attorney for advice, and to prepare a detailed written partnership agreement.
But the fact that there are no legal requirements doesn’t mean that it is advisable to be informal and nonchalant about this type of business ownership. It is prudent and very wise to have a written partnership agreement because it can prevent, or at least minimize, headaches down the road.
A partnership agreement will spell out who will contribute what, and how much of it; how the business will be managed, under what circumstances someone else can join the partnership, as well as how the partnership will be dissolved if and when the time comes.
Some advantages of a partnership are: it is easy to start, given that there are fewer legal formalities than starting a corporation or LLC; there is flexibility, though not as much as with a sole proprietorship; there is depth of experience and perspective, as there are several owner with various talents, skills, and points of view. There is also more ability to obtain capital, since there is more than one person to contribute money to the enterprise. Additionally, there are tax benefits; as the profits will be go directly to the partners and become the partners personal tax liability.
But, as with almost everything in life, there are disadvantages to this type of business ownership. The main one is that in a general partnership, each partner has unlimited liability for the debts of the business. Many believe that each partner is responsible according to the percentage of ownership, but this is not the case. Each partner is wholly responsible for everything. Another drawback is that there isn’t much stability because the illness or death of a partner can severely affect the business. It is also difficult for a partner to sell his or her share of the business because the other partners may not have the capital to buy him out at the time that he wants to sell, and they may not be willing to have that share of the business go to someone they do not know nor feel comfortable with, so the options are limited. And, if a partner dies, the other partners may resist giving the heirs of the deceased partner much say or control, with ensuing tension.
If you are considering this type of business ownership, it is imperative that you consult an attorney for advice, and to prepare a detailed written partnership agreement.
Saturday, November 3, 2007
Legal Structure of a Business: Sole Proprietor
A sole proprietorship is a business owned and operated by one person. The majority of businesses are sole proprietorships; the reason being that it is very easy to establish. You do not need to file documents with the Secretary of State, you don’t have to agree with someone else, you do not need anyone’s permission; all you need to do is open the doors, and you are in business. Of course, it is a little more elaborate than that, as there are several licenses and permits that you will need, depending on your type of business. Baring those requirements, a sole proprietorship is indeed the easiest form of business ownership.
But the ease of business formation is not the only advantage. As a sole proprietor the owner makes all the decisions for the business. He or she has complete control over the management and decision-making of the enterprise. There is also a great deal of flexibility because the owner can respond quickly to any problems, and can make changes without having to consult anyone else. In addition, there are no special taxes to be paid, as there are with corporations, LLCs, and other types of entities. The profits become the owner’s personal income, and are part of his or her tax liability.
But there are disadvantages. One of the most important ones is that the owner has total liability for the debts of the business, as well as any lawsuits filed against the business. This means that the owner can lose not just all his investment, but also all his assets, including his or her personal residence. Another disadvantage is that there are limited business deductions for health insurance and workers’ compensation insurance to name a few.
Other drawbacks include difficulty in obtaining capital for the business, risk to the business if the owner becomes ill or dies, and lack of depth in experience and perspective since only one person has the responsibility and control.
If you are considering a sole proprietorship for your business, talk to other business owners who run their companies as sole proprietors, and weigh carefully the advantages and disadvantages. Additionally, make sure that you consult your attorney for more information.
But the ease of business formation is not the only advantage. As a sole proprietor the owner makes all the decisions for the business. He or she has complete control over the management and decision-making of the enterprise. There is also a great deal of flexibility because the owner can respond quickly to any problems, and can make changes without having to consult anyone else. In addition, there are no special taxes to be paid, as there are with corporations, LLCs, and other types of entities. The profits become the owner’s personal income, and are part of his or her tax liability.
But there are disadvantages. One of the most important ones is that the owner has total liability for the debts of the business, as well as any lawsuits filed against the business. This means that the owner can lose not just all his investment, but also all his assets, including his or her personal residence. Another disadvantage is that there are limited business deductions for health insurance and workers’ compensation insurance to name a few.
Other drawbacks include difficulty in obtaining capital for the business, risk to the business if the owner becomes ill or dies, and lack of depth in experience and perspective since only one person has the responsibility and control.
If you are considering a sole proprietorship for your business, talk to other business owners who run their companies as sole proprietors, and weigh carefully the advantages and disadvantages. Additionally, make sure that you consult your attorney for more information.
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