Entity Formation

Two major factors that need to be taken into consideration is where the business will be formed and what type of entity the company will be. Certain types of businesses may not have a choice as to where they are formed. Once the type of entity that your business will be has been decided, the next step is entity formation. When setting up your business it is important that your business meet the criteria and follow the requirements for the specific entity that the business will be.

• Sole proprietorship – Businesses which are owned by a single person and are labeled as a sole proprietorship have certain advantages and disadvantages that need to be considered.

•Limited Liability Company – A limited liability company is emerging as one of the most popular types of entities that new businesses are utilizing.

• • Articles of Organization/Certificate of Formation – The formation document that is filed with the applicable government office, usually the Secretary of State

  • Operating Agreement – The internal governing document which controls how the company operates and how it is managed and run.

• Partnership – Having a precise and detailed partnership agreement prepared in advance is essential to ensuring the stability and success of a partnership.

  • General Partnership (GP) – All partners are subject to personal liability.

  • Limited Partnership (LP) – Certain partners are “limited partners” who are shielded from personal liability while others are “general partners” who are subject to personal liability.

  • Limited Liability Partnership (LLP) – Similar to a limited liability company, however instead of members, this entity type is comprised of partners who may be subject to liability for their own actions.

  • Limited Liability Limited Partnership (LLLP) – An LLLP is similar to an LLC and an LP in that at least one partner is designated as a general partner and therefore subject to liabilitiy.

• Corporations – The proper formation of a corporation is essential to ensure that all directors, officers and shareholders enjoy the protections and benefits that a corporation offers.

  • Corporation Formation – Unlike limited liability companies; corporations must follow certain formalities in order for the protection from personal liability to be upheld. This typically requires some additional planning as well as a corporate records kit to keep all of the documents organized.

  • Articles of Incorporation – This is the corporation’s formation document that is filed with the applicable government office, usually the Secretary of State.

  • Shareholder Agreements – This is the underlying agreement between all of the shareholders of the corporation and governs how their interest can be disposed of, sold or transferred.

  • Corporate Bylaws – This is the corporation’s underlying governing agreement which dictates the terms related to the company’s directors and officers.

  • Minutes – Every year, a corporation must have a meeting of the directors and shareholders. Record of the events that take place during the meeting must be recorded in the form of minutes.

  • S-Corp Designation – A “subchapter corporation” (S-Corp) is a type of tax election which passes the company’s corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. This can be advantageous for several reasons. However in order to be eligible for S-Corp election the company must be:

    • Be a domestic corporation

    • Have only allowable shareholders

      • May be individuals, certain trusts, and estates and
      • May not be partnerships, corporations or non-resident alien shareholders
    • Have no more than 100 shareholders
    • Have only one class of stock
    • Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations)

  • C-Corp Designation – By default, corporations are taxed under chapter C of the Internal Revenue Code (C-Corp). This designation involves double taxation whereby the corporation itself is subject to double taxation in that the company is not only taxed at the entity level but also at the shareholder level, when profits are distributed as dividends or realized as capital gains.

• Non-profit organization – Businesses that are non-profit have both a positive impact on society as well as numerous tax advantages. Before forming a non-profit organization, it is important to determine whether your business plans will be eligible to considered a non-profit.

• Joint Ventures – Joint ventures can be uniquely advantageous due to the combination of resources that often come with such endeavors.