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When an individual or group of individuals are considering forming a business there are many things to consider. The first and most frequently asked question is "should I form a corporation or should I operate as a sole proprietor? If there is more than one person contemplating ownership of a business, the question most often asked is "should we form a partnership, or a corporation, and if a corporation, what type of corporation should it be, i.e. a "C" corporation, an "S" Corporation or a Limited Liability Company." If the organizers of the new business want to form a Partnership, should it be a simple partnership or a Limited Liability Partnership? Choosing the right kind of business organization is important for many reasons. There are tax considerations, liability concerns, reporting requirements (including tax returns), capital requirements and governmental issues such as licenses, permits certificates of authority, required filings, and many more. When considering the formation of a business, there are certain professionals that should be consulted for advice and services. A lawyer, an accountant, an Insurance representative, a financial institution and possibly a financial planner. There are advantages of choosing one type of business organization over another, and likewise there are disadvantages. From some accountants' point of view, a sole proprietorship or partnership may be recommended over a corporation and may be considering tax issues to be of primary importance. From a Lawyer's point of view, a primary question may be protecting the individual's assets from business liabilities. A corporation, when properly formed, adequately capitalized and operated within certain legal guidelines will be shielded from the claims of creditor and personal injury claimants trying to attach the owner's personal assets. If a corporate form of existence is chosen, the next question will be should it be a "C" corporation or an "S" corporation (a corporation formed under subchapter "S" of the Internal Revenue Code). One advantage of an "S" corporation is that the individual does not have to pay income taxes at two levels: the corporate and the individual. Any income tax that is due is paid only by the individual and not the corporation. The "S" corporation allows the income to pass through to the individual(s) as if the individual(s) were operating as sole proprietors while still maintaining the corporate shield against the claims of creditors and others. This protection is referred to as the "corporate veil" behind which the assets of the owners of the corporation stand protected. Creditors and plaintiffs will attempt to "pierce the corporate veil" to get at the assets of the owners of the corporation. Their attempts will only be successful if the owners of the corporation failed to follow the basic rules of "corporateness" which include among others, proper capitalization, seperatation of corporate assets from the assets of individuals ( no combining of assets, i.e. using one's corporate checking account as a personal account as well and vise versa), advertising as a corporation, i.e. having the corporation's name on the check book, stationary letterhead, business cards and on vehicles. Aggrieved creditors will often state that they didn't know that they were dealing with a corporation. Will they be successful? Well, only to the extent "corporateness" was not maintained and can't be proven. The "S" corporation has disadvantages too, such as the limitation of the number of shareholders. A "C" corporation does not have that restriction which may allow it greater access to sources of capital by selling share of stock to many individuals. Both a "C" and an "S" corporation have to advertise their formation in a paper of general circulation as well as a legal newspaper in the community where the corporation is to do business. The legislature of several states have passed in recent years laws allowing for the formation of Limited Liability Companies (LLC) and Limited Liability Partnerships (LLP) affording flexibility to would be enterprisers. There are a number of appealing advantages to these two new business creatures. In an LLC, there is now no limit on the number of owners ( called members and not shareholders) and ownership and voting can be separated. An LLC allows for the formers to establish the rules; i.e., units of membership can be sold at what ever the owners can obtain and the incidents of ownership of a unit can exclude voting or management input and restrict the member to sharing profit only. And, an LLC does not have to advertise its formation which can save a considerable sum depending on the place of formation. Traditionally, in a partnership all of the partners are liable for the business actions of other partners. In a Limited Liability Partnership (LLP), the law allows for a limitation of liability provided certain requirements are met such as adequate insurance coverage. There are many other question about the formation of business organizations and how they do business in the mode chosen, e.g., should one do business under a "fictitious name" and if so how does one go about it, and why. Does one have to file legal papers somewhere to make the fictitious name's use proper and legal? What about protecting a business name? Should a 'registered trademark' be obtained and what are the costs and advantages. What about not registering a popular name that someone else has begun using either locally or in another jurisdiction and what can be done about it. For more information or to see an attorney to discuss your questions and or business needs, call for an appointment. The Firm is ready and able to advise you and assist you in achieving your goals in getting started in business or helping you if you are already in business. Ó 2003 James
W. Pearson, Jr., All Rights Reserved FOR
ADDITIONAL INFORMATION CALL THE TOLL FREE HELP LINE 1-800-232-1477 E-mail: lawyer@lawwalk.com JAMES
W. PEARSON, JR. Chair of the Federal & State Credit Union Department & Coordinator of legal consultations under the Family Legal Care Plans offered to credit union members. |
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