Creating and running your own successful business can be exhilarating and profitable, especially if you begin with a strong legal foundation. At the full service law firm of Earl Spielman & Associates L.L.C., our business formation attorneys have nearly two decades legal experience helping clients form corporations, buy and sell businesses, and counsel the following types of business entities:
- LLCs (limited liability companies) and LLPs (limited liability partnerships)
- Partnerships and limited partnerships
- Charitable organizations
- Churches and other nonprofit corporations and associations
Since 1988, we have been dedicated to helping clients with all of their business dealings, whether they want to form an LLC, need advice on the sale of their business, or are in the process of finalizing the succession of the company. We have also handled business contract disputes that end up in civil litigation.
Whether you are in the startup phase or are looking to pass your business onto your heirs, contact our business formation attorneys at Earl Spielman & Associates L.L.C., today. Our honesty and integrity in all of our client dealings is the reason we get many referrals.
In the United States, all corporations are formed under the laws of one of the 50 states.
Though formed under state law, a corporation need not be formed in the state in which the business operates. Many corporations, for example, are formed in Delaware or Nevada because the laws in these states favor the corporation, as opposed to the investors (shareholders).
However, state law for the state in which the business operates may still require the corporation to make some formal notification of doing business in the state. The corporation may also be subject to tax on income generated in that state.
A corporation is considered a separate legal and taxable entity. Therefore, it is the most complex and expensive form of business to set up. Corporations are governed by federal and state statutes. Formal paperwork must be filed with appropriate state government agency where the business is located. In most instances, filing of the Articles of Incorporation with the state government’s corporation division is required. Control of the corporation depends on stock ownership. Liability is generally limited to stock ownership. On other words, the maximum that stockholders can lose is the amount that they paid for the stocks. Corporations are subject to double taxation, meaning, taxes are paid at both the corporation level and on the stockholder's personal tax return. Taxes are levied on corporation profits when the entity files its own return. The stockholders will be taxed again when dividends are distributed to them. Shareholders cannot deduct any loss of the corporation.
An eligible domestic corporation can elect to be treated as a S Corporation. Just like their counterparts in a C corporation, stockholders of a S corporation are not personally liable for claims against the businesses. However, the lection of S Corporation will allow them to receive favorable tax treatment from the IRS. A S Corporation generally is exempt from federal income tax. its shareholders include on their personal tax returns their share of the corporation's separately stated items of income, deductions, losses, and credits, and their share of non-separately stated income or losses. This avoids taxation.
For Election of S Corp, A Corporation Must Meet All Of The Following:
- The corporation must be a domestic corporation;
- It has no more than 75 shareholders. A husband and wife (and their estates) are treated as one shareholder for this requirement;
- Its shareholders are individuals, estates, selected exempt organizations, or certain types of trusts;
- It has no nonresident alien shareholders;
- It has only one class of stock;
- It is NOT one of the following:
- A bank or thrift institution that uses the reserve method of accounting for bad debts;
- An insurance company subject to tax under certain tax rules;
- A corporation that has elected to be treated as a possessions corporation;
- A domestic international sales corporation (DISC) or
- It has a permitted tax year;
- Each shareholder consents to the election
A partnership involves two or more persons who carry on a trade or business. Each person contributes money, property, labor, or skill, expects to share in the profits and losses, and carries on as a co-owner of the business. A partnership can be formed by oral agreement between two or more persons, but a legal partnership agreement is highly recommended. Just like sole proprietorships, no formal paperwork is required unless the partnership will be doing business under a trade name or a DBA. Check with the city or county government where the business is located for appropriate filing requirements. Since partners are co-owners, they share financial and management control. The partners are personally liable for any debts incurred by the business. In general, death or withdrawal of any partner terminates the partnership unless there's agreement among the partners. Partnership is not a taxable entity. Each partner includes his or her share of the partnership's income or loss on his or her tax return.
Limited partners have limited personal liability for claims against the business. However, they are not involved with the management or operation of businesses. They have no control over the business. Most states required filing of formal agreement for a limited partnership.
Limited Liability Corporation (LLC)
The Limited liability company (LLC) provides the desired limited liability while avoiding some of the drawbacks (like double taxation and excessive paperwork). Its is a relatively new form of business organization that is worth a serious look. However, the LLC is not available in all states so be certain to find out how your state's law applies. The legal status of the LLC (to date) is indeterminate in many jurisdictions.
The LLC allows for multiple owners, or members. Additionally, there is a managing member, who also enjoys the rewards of limited liability and is typically the person responsible for managing the business. (However, if the LLC has just one owner, it will be taxed as a sole proprietorship.) The profits or losses of the business pass directly through to the owner's personal income tax return, Form 1040. The LLC files a Form 1065, and then lists each member's taxable profit on Form K-1. The bottom-line profit of the business is not considered to be earned income to the members, and therefore is not subject to self-employment tax. But keep in mind that the managing member's share of the bottom-line profit of the LLC is considered earned income, and therefore is subject to self-employment tax.
Members are compensated using either distributions of profit or guaranteed payments. A distribution of profit allows each member to pay themselves by merely writing checks--whenever they need the money (provided the business has the available cash). However, as a member of an LLC, you are not allowed to pay yourself wages. Guaranteed payments represent earned income to the members, thereby qualifying them to enjoy the benefits of tax-favored fringe benefits. The members' share of bottom-line profit is not considered earned income because the members are considered to be inactive owners; therefore, the members do not qualify for special tax-favored "fringe benefit" treatment.
A corporation can be a member of an LLC. This allows you to create an additional level of ownership, which is designed to create an entity that can offer such traditional fringe benefits as retirement plans and an additional level of protection from liability.
The managing member of an LLC can deduct 100 percent of the health insurance premiums he or she pays--up to the extent of their pro-rata share of the LLC's net profit, because the profit is considered earned income. Note: If a member has earned income, he or she will also qualify. If the state where you intend to operate has enacted a law allowing the creation of LLCs and you could use the features it offers, yet you don't want all of the paperwork and costs associated with incorporating, call us to discuss the pros and cons of creating a LLC and if it's best for your situation.
Sole proprietorship is the easiest and least expensive way to start and operate a business. A sole proprietorship is owned by one individual. There is no specific legal filing requirements for sole proprietors who are doing business under their own names. However, doing business a name other than the owner’s, a trade name or Doing Business As (DBA) requires registration with the County Clerk’s Office or other appropriate office where the business is located. The filing fees are usually minimal. Since the business is owned by one person, the owner has total control of the operation. The business has no existence apart from the owner. Therefore, the business ceases to exist when the owner dies. Because the business and its owner are considered the same entity, the owner is personally liable for any business debts. The owner’s personal assets can be used to satisfy any business obligations or court judgments against the business. As a sole proprietor, you report any business profit/loss on your individual tax return. Business losses can be used to offset any income you earned form other sources. Generally speaking, if debts and lawsuits are not a big worry, sole proprietorship is a good choice, at least initially. There’s nothing that will stop you from starting out as a sole proprietor, and then changing (later) when it makes good business sense to do so.