Legal Tip of the Day: Selecting the Right Entity
TALK LEGAL TO ME- JUST THE TIPS OF LAW:
Talk Legal to Me is here to provide you with “Just the Tips of the Law.” Today’s legal tip is the importance in selecting the right entity for your new business or venture.
It is crucial to select the right type of entity when deciding to form a new business. At Burdick Law we are experienced in helping new businesses and ventures form the right entity for them. Call us today at 702-481-9207 or email at firstname.lastname@example.org!
There are four types of business entities generally used, which provide varying amounts of liability protection to their owners: corporations, limited liability companies, limited partnerships and limited liability partnerships. The following is a short review of each type of entity. Feel free to message us with any questions you might have!
C-Corporations are the oldest and most well-known types of business entities formed under the relevant statutory authority. A corporation is formed by filing a Certificate of Incorporation or Articles of Incorporation (“Articles”) with the Secretary of State. A Corporation has various corporate formalities that must be followed in order to stay shielded by the “corporate veil.” First, upon issuance of the Articles, the corporation’s shareholders should hold their first meeting at which meeting they should elect initial directors, if they are not named in the Articles of Incorporation, and should also adopt the Corporations by-laws. The By-Laws is the governing doctrine of the entity and, thus, you should seek the advice of counsel to ensure that your By-Laws addresses the needs and concerns of the entity. Importantly, the business and affairs of a corporation are managed under the direction of the Board of Directors.
An “S Corporation” is a federal income tax law classification and designation and is governed by “Subchapter S” of the Internal Revenue Code Section 1361. Essentially, an S Corporation is a conduit or “pass through entity” for federal income tax purposes, meaning the entity does not generally pay tax on its earnings, similar to the taxation of a partnership of an LLC, and avoids double taxation scenario that can occur in C Corporation. Generally, an S Corporation is subject to only one level of tax, at the shareholder level. Items of income, loss, gain, deduction and credit are passed through the S-Corporation to its shareholders. If you are considering electing to treat your entity as an S-Corporation then you should consult a CPA especially with the new Tax Bill.
Limited Liability Company:
A Limited Liability Company (“LLC”) is a business entity in which all of the owners (called “Members”) have limited liability for the acts of the company and the other members. The LLC also protects the members from outside liability, i.e. attachment from creditors. This is because a member of an LLC is not considered a co-owner of, and has no transferable interest in, property or assets of the LLC. Only the member’s “distributional interest” is treated as personal property which may be attached by creditors.
However, even then, a creditor in the state of Nevada, that obtains a judgment against the debtor-member is limited solely to a charging order or lien against the discretionary distributions which are made to the member, unless the judgment creditor is able to pierce the corporate veil.
An LLC can be member-managed or manager-managed. In a member-managed LLC, the members are in charge of the management of the LLC, while in the manager-managed LLC the members elect one or more managers, who operate similar to officers of a Corporation. The operating agreement for the LLC needs to outline who the managers are and specifically identify what authority the members and the manager have. Essentially, an LLC can have either decentralized management, where every owner participates in the management, or centralized management, where the power to make management decisions is concentrated in the select management group. The Operating Agreement is the governing doctrine of the entity and you should consult an attorney to ensure that the needs and concerns of the entity are being addressed in the Operating Agreement.
You can elect to have your LLC treated as an S Corporation by filing Form 2553 Election by a Small Business Corporation with the IRS. This form, with respect to a taxable year, must generally be filed any time during the preceding year or any time on or before the 15th day of the 3rd month of the applicable year.
A Limited Partnership (“LP”) is an entity which is required to have a minimum of two partners, including at least one General Partner and one Limited Partner. The Limited Partners have limited personal liability for the LP’s obligations, while the General Partner’s liability is unlimited with respect to the LP’s obligations. The types of eligible owners, number of owners and ownership classes of LP’s are generally unlimited. An LP is formed by filing a Certificate of Limited Partnership with the state’s Secretary of State. Similar to an LLC, the LP provides flexibility t the LP’s partners in allocating profits, losses and distributions. These types of entities are usually formed to attract investment partners- the Limited Partner.
Limited Liability Partnerships:
In many states general partnerships may register as a limited liability partnership (“LLP”) by filing an application with the states Secretary of State. The application must generally set forth: (i) the name of the partnership; (ii) the address of the CEO of the LLP and if different then the street address of the office; (iii) the name and address of its agent for service of process; (iv) the number of partners; (v) a brief statement of the type of business engaged in; (vi) an affirmative statement that the partnership is registering as an LLP; and (vii) a deferred effective date, if any, of an application for LLP status. The Uniform Partnership Act of 1997 provides substantial limited liability to partners in limited liability partnerships, over thirty states have not adopted this Act though and still follow the prior act providing for less limited liability benefits to partners.
Contact Burdick Law today for more information on selecting the right entity of you at 702-481-9207 or email at email@example.com!