legal}
business
There are several options for business structures, with each option having its own benefits and drawbacks. New business owners should consider each of these options prior to starting a business to make sure they structure a business entity in a manner that works for their particular business. must file Articles of Incorporation with the Secretary of State. A corporation must have bylaws to guide the general organizational structure of the entities; including how and when meetings will take place, voting and other administrative issues. Typically a corporation will also have a shareholder agreement to govern how shares can be sold or transferred. For many small businesses, corporations may have too many formalities to maintain and to many “hats” for the owners to manage so they consider alternative business formations.
Owners of an LLC are called members. Unlike S corporations, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members, and a sole individual may create a single-member LLC.
LLCs also have increased flexibility in tax treatment. The LLC can elect to be taxed as a corporation, partnership, or a “disregarded entity” (meaning the LLC pays taxes through the owner’s individual tax return) by filing specific tax election forms with the IRS. If the LLC does not make a separate tax election, a domestic C Corporations A C corporation is subject to double taxation. This LLC with at least two members is classified as a partmeans that the corporation pays taxes on its profits nership for federal income tax purposes. and its shareholders pay taxes on any capital gains from dividends. The profit of a corporation is taxed to Members of an LLC enjoy limited personal liability the corporation when it is earned by the corporation, with increased flexibility in tax treatment and manand then these profits are taxed to the shareholders agement. However, to effectively manage the company when the profits are distributed to shareholders as div- and protect personal assets, an LLC should have a well idends. Obviously this can provide disadvantages from structured operating agreement between the india tax perspective, especially for small business owners. vidual members of the LLC. The operating agreement should set how additional members may join the business or withdraw from the business, and what happens S corporations An S corporation is a separate type of corporation that to an owner’s interest in the event of their untimely elects to pass corporate income and losses through death, bankruptcy or other life event. to their shareholders for tax purposes. This allows S corporations to avoid double taxation. A corporation can make a Sub Chapter S election by filing a special Seek Professional Advice tax election form with the IRS. All of the other Ultimately, Joan and Ann decided to discuss their busiformalities of a corporation must still be followed in ness with a business attorney and decided that an LLC was the best choice for their particular business. They an S corporation. felt the balance between limited personal liability, ease To quality for S corporation status, the corporation of administration and management flexibility would must meet separate requirements. To qualify for S provide significant benefits for them. However, every corporation status, the corporation must be a domestic business owner should carefully consider the various corporation. Also, the corporation can have no more business entity structures prior to starting a business than 100 shareholders and the shareholders must be and seek professional advice. individuals, certain trusts and estates. Partnerships, corporations and non-residents cannot be sharehold- A business attorney can advise you how to structure ers of an S corporation. Further, an S corporation can your business, as well as discuss the benefits and drawonly have one class of stock; it cannot have separate backs of specific types of legal entities for your parvoting classes for stock. There are also certain types of ticular business. The decision about the specific legal business such as financial institutions and insurance structure for your business will impact your tax liability, ownership rights, and business operations. Making the companies that cannot register as an S corporation. right decision about the legal and corporate structure For a small business that meets these requirements, an of your business is critical to your long-term success, S corporation can be beneficial. S corporations pro- so discuss your options with your tax advisor and busivide the limitation on liability to protect personal as- ness attorney to determine what is right for your spesets of the owners, while avoiding double taxation on cific business. While creating a separate entity for your the corporate tax. However, because all of the other business will not ensure that your business will always formalities of a corporation must still be followed in be successful, it can help protect your personal liability a S corporation, some business owners decide they do and help organize the structure and management of not want the additional administration involved in an your business. S corporation. For advice regarding incorporating, creating a separate legal entity or general business law, contact Kelly O’Brien Limited Liability Companies at Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) A Limited Liability Company (“LLC”) is a hybrid be752-6373/ www.measurelaw.com tween a partnership and a corporation. Members have limited liability protection similar to a corporation but reduced administration and additional flexibility in This article is intended for educational and information purposes only, it is not intended to act as legal advice. management similar to a partnership.
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