Small businesses face many situations for which they require legal services. An attorneys' insight into certain aspects of your business can make a difference. We can help you lay a strong and solid foundation to support your business as it grows and avoid potential pitfalls before they arise.
Ownership v. Control v. Income ... Selecting A Business Entity ...
When it comes to selecting a business entity to take your enterprise to the next level, it is essential to understand those key factors that make the difference and ownership only one of them. Control, governance structure, transferability, and income potential are some of the most important factors you consider before choosing between LLC, Corporation, Partnership, or any other business structure.
It is important to understand that there are some legal entities that limit the owner's control and management more than others. This is important because those who manage the organization make important decisions such as the distribution of profits, the purchase of machinery, or any other decisions related to the business's day-to-day activities.
In general terms, partnership, limited or unlimited, allows owners to control and manage the business. Limited partnerships have a particularity; there are two types of owners. An unlimited partner, who responds personally for all liabilities and obligations acquires as a result of carrying on the business, and limited partners who contribute money or other assets, who do not get involved with the management of the business, and whose responsibility extends only to amount of their contribution to the partnership. If a limited partner gets involved in the management of the business he no longer enjoys the benefit of limited liability.
Corporations do not allow owners to manage the business's day-to-day activities unless they are elected as directors or corporate officers. On the other hand, LLCs allow the owners or "members" to select whether they want to manage the business themselves or whether they want to elect managers to handle the business.
Governance structure speaks of the number of people and the roles needed in the organization to manage it properly. The more complex the governance structure is, the more costs and time a business requires.
Partnerships require only two or more people to join efforts to carry on a business as co-owners. However, more complex business entities, such as corporations, require a more complex structure.
Corporations cannot be managed by their owners unless they are elected as directors or officers. A board of directors manages the corporation. Of course, a corporation can be an entity with only one owner. In that case, the sole shareholder occupies all positions. Nevertheless, even that single owner must demonstrate that corporate formalities are followed to handle the business for purposes of compliance. Corporate formalities are important, especially to keep the "corporate veil," in other words, to keep the benefit of the limited liability.
LLCs can be managed by their members (Member-Managed LLC) or by one or more managers (Manager-Managed LLC). In either case, the formalities are important to keep the protections of the "corporate veil".
You may think that by owning a business, you will automatically receive income from it. Well, it may not be as simple as that. In the case of a business owner who does not incorporate, in other words, who does not form a legal entity, that business owner receives income directly from his customers. However, when a legal entity is created, or the business owner is in partnership with another, the situation changes.
Partners share equally in the monetary benefits of the business unless there is an agreement to the contrary. Unlike other legal forms, when it comes to partnerships, income is distributed equally regardless of the amount of the contributions made by each partner. In the case of limited partnerships, unless otherwise agreed to, partners share equally the income of the business, but their responsibility is different. There is one partner who personally responsible and other partners who enjoy limited liability.
In the case of the corporations, it is important to understand that the ones who run the business and decide whether income is distributed are the member of the board of directors by vote. Directors receive compensation from the company for their role. If owners of the corporation want to receive income directly from the corporation, one way is to be a director or an employee of the corporation. Now, if the owners of the corporation, who are not employees or directors, want to receive income by way of dividend distributions, they have to wait for the directors to approve such a distribution. To deal with these, corporate shareholders select directors, at least one, who will support their interest and advocate for these distributions.
In the case of an LLC, it all depends on the rules stated by the members of the LLC. If the LLC members agreed that a manager would make the decision of profit distributions, they should set some guidance or rule for making such a discretionary decision. On the other hand, if the LLC is member-managed, distributions of income will be decided by the members by vote, according to the percentage of interest in the LLC.
Another important aspect to consider is the transferability of the interest in the business. We all want to be successful in our business endeavors; however, things could go wrong; in that case, it would be great to be able to transfer your interest in the business to some else. In the case of a partnership, the concept of transferability rarely applies because partners come together in consideration of each other's personal characteristics. Additionally, since no express or written agreement is required to create a partnership, no special formality is required to end it.
Limited partnerships must be agreed to in writing. Consequently, whether an interest in a limited partnership is transferable depends on the terms of the agreement. Usually, general partners cannot transfer their interest because they are in charge of the management, responding personally. If a partner who has management and control of the business wants to leave, unless the other partners agree to continuing with the business, the business must be dissolved.
Shareholders, owners of shares, own corporations. In general terms, the shares of a corporation are freely transferable. However, in real (practical) life, the transferability of shares also depends on the existence or not of a market for the shares. If the shareholder who wants to leave has no agreement that protects his interest or is a minority shareholder who cannot influence the decision-making process, it is unlikely that he finds a buyer for his shares. On the other hand, if the corporation is one of those who trade their share in the capital markets, such as the New York Stock Exchange, it is more likely that the shareholder who wants to leave finds a buyer.
LLCs are a mix of different concepts. As a result of that, the transferability of a member's interest depends on the terms of the LLC agreement. There are cases in which a Member-Managed LLC has an agreement that limits the transferability of interest or states that even if a member sells his interest, the new member will not be allowed to get involved in the LLC management.
In conclusion... before selecting a business entity, keep in mind that different factors are worth reviewing and that an attorney can help you make the right choice because she will be able to explain the terms of an agreement mean. For more information, feel to call or email. The law office will be happy to guide you and see you have success.
What Should Entrepreneurs Know About Incorporation and Business Structure?
There are tax and legal considerations for organizing your business as something different from a sole-proprietorship. Incorporation allows you to protect your personal assets, acquire limited liability, especially in risky endeavors, and take advantage of deductions tax benefits provided to the business. Additionally, start-ups and small businesses incorporated have a better chance of getting investors because no investor want's to be involved in a project that offers to risk limits.
Protection of personal assets
Once a business is incorporated, the business is a legal entity (like a person) different and separate from its owners. The assets acquired by the business entity are not the owners' assets and cannot be attached by creditors. In order words, creditors or third parties may only sue the business to recover money or damages. Following the same logic, the assets of the individuals that own the business are separate property. The separation of assets allows business owners to protect their personal assets from the risk and liabilities associated with carrying on the business activities. Additionally, it allows business owners to organize their affairs and have a clearer picture of the real situation of the business.
The great endeavors of businessmen have been achieved thanks to limited liability. Limited liability refers to the fact that those involved in a business may only respond to the extent of the amount contributed to the business. Limited liability allows investors and entrepreneurs to measure and control their risk. Additionally, the possibility of limiting one's liability creates opportunities to transfer interest in a business easily and also increases the number of participants.
If you are looking for investors, you have a better probability of getting investors if you are incorporated. If there is anyone interest in putting money in your business, they will more likely do it if they also enjoy the benefits of assets protection and limited liability. Additionally, once a company has been incorporated is in a better position to hire personnel, assume risks and operate.
Which is the legal business entity I need to start?
What is a Partnership?
Even though partnerships remain one of the most straightforward business structures available for those who want to work together to make their business a success, it is important to understand that partnerships do not benefit from limited liability. Partnerships require minimal paperwork, and they rarely require public filings. Additionally, no one should be part of a partnership without a well-drafted agreement. If you are looking to start your own partnership, a business lawyer can help you draft the best possible partnership agreement for your needs. At the Law Office of Giselle Ayala Mateus, we can help you decide whether a limited partnership or general partnership is right for your needs and help you draft the necessary documentation quickly.
A partnership is basically an agreement to carry on a business a co-owners. A partnership may be formed without an express agreement. In this scenario, the main risk is to end up in a relationship that binds you fully for the unauthorized conduct of another. With an agreement, however, you may choose the type of partnership you want to form, limit the partner's authority, agree on the distribution of costs and profit, exclude business from the partnership, and more.
Types of partnerships
A partnership may be a general partnership or a limited partnership.
General Partnership (GP). General partnerships make up most partnerships in the U.S., as they are the simplest type of partnership available. In general partnerships, each partner is involved in the day-to-day management of the business and shares in the unlimited liability agreed to under this structure.
Limited Partnership (LP). Like a general partnership, general partners in limited partnerships run the business and take on unlimited liability. Unlike general partnerships, however, limited partnerships can have “silent” limited partners who are not involved in the business's operations and have liability limited to the amount of their investment.
What is an LLC?
A limited liability company or LLC is a special business structure in the United States that combines some elements of the corporation and some attributes of a partnership. The owners of an LLC enjoy the privilege of limited liability. However, they are taxed as a partnership (only once). The owners of the LLC are called "Members." Limited liability companies are hybrid entities. The regulations surrounding LLCs may vary from one state to another. Many states don't restrict ownership, which means that anyone can be a member, including individuals, corporations, foreigners and foreign entities, and even other LLCs.
Formation of an LLC
The formation of an LLC requires a formal act of filing the Articles of Formation or Article of Organization with the Secretary of State of the jurisdiction where the LLC is formed. Additionally, as opposed to corporations, LLCs are governed by an Operating Agreement. This document is equivalent to the By-Laws. Additionally, to form an LLC, you need at least to complete the following steps:
- Choosing an available business name
- Deciding if the LLC will be Member-Managed or Manager-Managed.
- Filing articles of organization with the state
- Paying filing fees and license fees if necessary
- Creating the operating agreement for your business
- Holding your first annual meeting
The formation of an LLC can be easier than a corporation. Additionally, an LLC is easier to manage since it is not obligatory to have a board of directors, a secretary, and a treasurer. On the other hand, if you have plans to expand your business or go public, it may be better to form a corporation from the beginning. Given the flexibility of LLCs, this is also an interesting structure for short-term transactions when the parties involved want to benefit from limited liability. For instance, to buy or sell real estate.
What is a Corporation?
A corporation is a business organization separate and different from its business owners. A corporation is a legal person. Corporations are their own legal entity which the owners control through the shares they have in the company, by electing directors or by being elected as the directors or the officers of the corporation. When incorporating, you will have the opportunity to state how many shares you own as the corporation's register.
Forming a Corporation
To form a corporation, it is important to make legal and accounting considerations. If you are a business owner conducting activities overseas, keep in mind that the rules applicable to corporations may change from one state to another. Additionally, you have the option to file an application for authority to operate as a foreign company, or you may form a domestic corporation. To form a corporation, you need at least to complete the following steps:
- Choosing an available business name
- Appointing directors
- Filing articles of incorporation with the state
- Paying filing fees and license fees if necessary
- Creating bylaws for your business
- Holding your first annual meeting
- Issuing stock certificates
Bylaws are not a legal requirement, but they are highly recommended. Corporate directors will also need to be appointed, and a registered agent may be a necessity to receive official notices from different agencies such as the Department of State or the IRS.
If you haven't set up your corporation, our office can help you with all the necessary steps, from incorporating document drafting and ongoing legal counsel for compliance. If you are unsure of which entity to choose, seeking help from a lawyer is recommended.
Public and Private Corporations
The main difference between private and public corporations is that public corporation negotiates their share freely in the capital markets. A publicly owned corporation will allow investors to be able to buy shares of your corporation. When going public, your corporation must follow further rules and regulations to adhere to the strict rules of the U.S. Securities and Exchange Commission (SEC).
A private corporation, on the other hand, aka closely held corporation, is an entity whose shares cannot be freely negotiated. There is no market for them. Owners of a closely held corporation usually profit from the entity by receiving a salary for their services as directors or officers or by distributing dividends.
What is a Limited Liability Partnership or LLP?
Limited Liability Partnerships or LLPs are a flexible legal and tax business organization that allows partners to benefit from economies of scale by working together while also reducing their liability for the actions of other partners. The LLP is a formal business structure that requires a written partnership agreement. Additionally, as in a general partnership, all partners in an LLP can participate in the management of the partnership.
Formation of an LLP
To form an LLP, the partners must complete a formal act of filing papers before the Secretary of State. Additionally, only certain professionals are authorized to form LLPs. Limited liability partnerships are generally connected to firms of lawyers, accountants, architects, and similar professions.
How is management relevant to decide what business structure to use?
It is important to understand that not all business structures allow owners to conduct the business's day-to-day activities. Partnership structures allow owners to conduct the daily activities of the business. This means that the appointment of managers is not necessary, and owners can contract on behalf of the business and manage the business.
Corporations, on the other hand, are more complex business structures. Shareholders are not authorized to conduct the daily activities of the business unless they are appointed as directors, officers, or employees. This also means that corporation must appoint at least a president, a secretary, a treasurer, and directors. Additionally, this management structure requires more formalities and costs than other business structures.
Limited Liability Partnerships and Limited Liability Companies are very interesting business structures because they provide the benefit of limited liability while allowing owners to get involved in the business's day-to-day activities without naming managers or other executives.
What do I need to if I have a company overseas and want to operate in the US?
Business organization laws are state law matters. Accordingly, all business entities operating in a state where the business is not incorporated are considered foreign entities. All foreign entities have two options: filing an application for authority or forming a domestic entity. Here, cost and tax planning are some of the most relevant factors to consider. Now, you may be thinking about whether it is, in fact, necessary to file for authority or incorporate another entity. If a business does not take any of these steps, it might be sanctioned for conducting business in the state without authorization. Additionally, if the business is not registered in the state, it might have problems litigating any dispute in the state.
What makes a business structure more expensive than others?
The more complex the business structure, the more costs it involves. Corporations are some of the most complex business structures. The law requires more formalities and record-keeping practices from corporations, which in general increases costs on maintenance. On the other hand, corporations may also enjoy additional benefits regarding tax exemptions and credits. Partnership forms and LLCs are more flexible business structures, directly impacting the reduction of maintenance costs. On the other hand, these types of entities may find it more difficult to get investors or grants given their flexibility and lack of required formalities.
What kind of corporate formalities are the most important to maintain my business in compliance?
First, compliance formalities may be different from one state to another. However, some of the important formalities are these:
- Adequate Capitalization.
- Independent Operation.
- Governing Documents.
- Comply with Formalities.
- Good Standing.