Business Formation is the process of choosing what type of structure and management will be best for the business as well as accomplishing the economic and legal steps to form that entity. Choosing the appropriate business structure from the start is an important strategy for determining your liabilities, responsibilities, privileges, and restrictions.
On behalf of our business clients, we prepare a number of business documents necessary for the operation of their businesses. Some of these documents include:
- Articles of Incorporation
- Partnership Agreements
- Operating Agreements
- Shareholder Agreements
- Professional Service Agreements
- Non-Disclosure Agreements
- Agreements for Sale and Purchase of Business Assets
- Certificates of Present Interests
- Transfer Ledgers
- Bill of Sales
- Assignments and Transfers of Business Interests
- Promissory Notes
- Security Agreements
- Corporate Recapitalizations
Once formed, we also help our clients properly maintain the business structure through the preparation of “maintenance” documents such as, annual meetings, minutes, and resolutions.
Failure to properly form and conduct business can expose the business owners, investors, lenders, and managers to the business liabilities. There are a number of considerations that must be examined when determining which structure is right for each client.
Business structures we commonly set up for our clients include:
A Sole Proprietorship is a basic setup where one person owns the company and is responsible for its assets and liabilities. Profit and loss are reported on the owner’s personal tax return. While Sole Proprietorships are the simplest business form to establish, they do not offer the owner any personal liability protection from business debts.
General Partnerships and Limited Partnerships
In a General Partnership (GP) the business is owned by more than one person. The owners are partners, and they are responsible for the partnership’s obligations, debts, and assets. This entity type is straightforward to create but fails to offer the partners any personal protection from the debts of the business. A Limited Partnership (LP)—not to be confused with a Limited Liability Partnership (LLP)—is a partnership made up of two or more partners. A Limited Partnership is required to have both general partners and limited partners. The general partner oversees and runs the business while limited partners do not partake in managing the business. The general partner of a Limited Partnership has total personal liability for the debts and obligations of the partnership, and any limited partners have limited liability up to the amount of their investment.
Family Limited Partnerships
A Family Limited Partnership (FLP) is a Limited Partnership whose partners consist of related individuals, trusts, or corporations. General partnership interest entails owning the lion’s share of stock in the Family Limited Partnership and the ability to make business decisions. General partners are directly involved with the daily running of the business. In Family Limited Partnership’s, parents or grandparents are usually general partners. Limited partnership interest means having a lack of control over business decisions and limited partnership shares in comparison to those the general partners hold. In Family Limited Partnership’s, it is common for children to start as limited partners and later become general partners.
Limited Liability Companies
Limited Liability Companies (LLCs) are a popular business formation type. It is a company that combines the characteristics of a General Partnership and a Corporation. A Limited Liability Company provides owners of the company personal liability protection from debts of the company. It also provides tax advantages at the business level as Limited Liability Company owners may report profits on their individual tax returns rather than corporate tax returns, preventing double taxation.
A Corporation, if properly formed, is a legal entity that has separate legal existence from its shareholders and directors. Because Corporations are separate legal entities from their owners, liability for debts or damages caused by the Corporation are limited to the Corporation’s assets. There are two primary types of Corporations: C-Corporations and S-Corporations. C-Corporations retain their profits and losses at the corporate level but have double taxation. They are taxed on their earnings, and shareholders are taxed on their corporate dividends. With S-Corporations, profits, and losses flow through the business to the owners.
A Non-Profit Corporation is organized for a purpose other than to produce income. Typically, it is formed to accomplish a common good. The reason the non-profit is formed may be religious, educational, charitable, or another suitable purpose. Non-profits do not have shareholders or issue stock. Non-Profit Corporations may apply for tax-exempt status under section 501(c)(3) of the Internal Revenue Code. When a non-profit has a 501(c)(3) designation, any contributions made by donors are tax-deductible to the donor.
A Joint Venture is when one or more individual or companies decide to join forces for a specific purpose. All parties wish to remain independent but also want to work together towards a common goal. Joint Ventures require that the parties execute a contract spelling out the responsibilities of each party and their relationship to one another.