Setting up a Limited Liability Company, LLC

What is a Limited Liability Company and How to Set It Up

Another popular is the structure that has become popular with entrepreneurs is the limited liability company. A Limited Liability Company, LLC brings together some of the best features of the Corporation and the partnership.

A limited liability company allows the business owners 2 protect themselves from personal liability while allowing the kind of tax benefits that the partnership enjoys. A limited liability company is not subject to double taxation as corporations are and earnings and losses are passed through to the owners which are included on the personal tax returns. All this is pretty similar to an S corporation except that there are a few differences. A limited liability company, LLC, has no limitations on the number of shareholders unlike an S corporation which has a limit of 100 shareholders. Also, any member or owner of the LLC is allowed to fully participate in the business operations as opposed to a limited partnership where only the Gen. partners are allowed to run the operations and limited partners are only the silent investors.

In order to set up a limited liability corporation, LLC, you must file articles of organization with the secretary of state in the state where you intend to operate your business. Some states may also require you to file an operating agreement which is similar to a partnership agreement. Same as a partnership, a limited liability company does not have perpetual life. Some state regulations require that the company be dissolved after 30 or 40 years. Also just like a partnership, the company dissolves when a member dies, quits or retires.

In order to operate a limited liability company in several states you need to understand how one state treats the LLC structure created in another State. It is a good idea to use professional help from an accountant and an attorney when dealing with various rules and regulations governing the LLC’s.

Another recent development in the legal business structure is that of limited liability partnership, LLP. In case of a limited liability partnership, the personal liability of each partner is limited usually to the malpractice and decisions made by themselves and does not extend to those of other partners. This legal business structure works well for professionals were involved in practice together such as physicians, lawyers, artists etc.

Legal Checklist for Corporation

Always stay on the right side of the law when you are running a corporation. Failing to comply with the state regulations that apply to your business as a corporation may result in personal liability for business debts and even the cancellation of your incorporation set ticket. The following are some quick guidelines that you should follow in order to make sure that your corporation is always in compliance with the state laws and regulations.

  1. Call the secretary of state each year to check the status of your Corporation. Put the annual meetings whether it is shareholders or directors meeting on the placards. In check all documents and contracts signed by the officials of the company to ensure that proper name along with the name of the company has been used. Never sign an official document with just the person named.
  2. Never use your own name on an official document followed by DBA, standing for doing business as. If any older contracts have this, we appreciate those contracts.
  3. Before undertaking any procedure out of the normal course of business like purchasing major assets, write a corporate resolution permitting it and keep all completed forms in the corporate book.
  4. Never use corporate business accounts and checks for personal payments and personal debts and vice versa. Get professional advice about continued retained earnings not needed for immediate operating expenses.

When making a choice between the kind of business set up you want, you should understand that the business losses cannot be deducted on your personal tax return in the case of a corporation. Business structures such as partnerships and sole proprietorships as well as S corporations allows you to make those deductions.

How to Incorporate a Business

How to set up a corporation

In order to start the process of incorporating your business, you should contact the secretary of state or the state office that is responsible for registering corporations in your state. Inquire about the forms, the fee the instructions that you need to follow.

In most circumstances it is advisable to use an attorney for legal advice as well as to guide you during the process of incorporating a business. The amount of paperwork that needs to be filed and the information that needs to be provided to the state office is often complicated. You can do the entire process yourself and save yourself the expense of using a lawyer which can cost anywhere from $500-$1000 but doing it yourself may take more time and also there is a chance that you could leave out some important detail or some point in the state law which could result in delay in the approval.

In order to get an idea of what you need to do to incorporate a business you can use books and software initially. Your expense will be the cost of these resources, the filing fee and other costs associated with incorporating a business in your state if you decide to do the whole process yourself.

The 1st and important step in incorporating a business is to prepare a certificate or article of incorporation. You can get a printed copy of this in certain states which either you or your attorney can complete. The information that needs to be provided on this certificate includes the name of the Corporation, the purpose of the corporation., The names and addresses of those incorporating and the location of the principal office of the Corporation. You will also need a list of bylaws that describe in greater detail than the article how the corporation will run, including the responsibilities of the company’s shareholders, directors and officers as well as other information such as when the stockholders meetings will be held etc.

Once your certificate of the Corporation has been submitted and duly accepted, the secretary of the state’s office will send you a certificate of incorporation.

Once you have managed to get your business incorporated it is equally important to stay updated with the laws and regulations in your state. It is equally important to follow these laws and regulations because any violation of these laws could result in legal hassles. Noncompliance wit the state regulations can enable a court to byline the corporate veil and hold you and other business owners personally liable for business debts.

You should always keep accurate financial records as required by the rules and regulations. Usually the accounting procedure is specified for a Corporation and how its supposed to maintain its income and expenses records.

The Corporation should also issue stock, file annual reports and hold yearly meetings to elect company offices and directors even if they’re the same people as the shareholders. Be sure to keep the minutes of shareholders and directors meetings. On all references to your business such as contracts, letters make sure to identify it as a corporation using Inc. or Corp. whichever your state requires.

Any letter or document that is signed by any of the officials of the company should be followed by the name of the company after the personal signature. Make sure your banker, clients and any other person whom you’re dealing with those that you as an officer of the Corporation and not acting on personal liability.

Sample PreIncorporation Agreement

Agreement made this___________day of_________, 20_between__________,_and___________ whereas the parties hereto wish to organize a Corporation upon the terms and conditions hereinafter set forth; and whereas the parties wish to establish their mutual rights and responsibilities in relation to their organizational activities; now, therefore, in consideration of the premises and nature covenants contained herein it is agreed by and between the parties as follows,:

FIRST: the parties shall forthwith cause the Corporation to be formed and organized under the laws of the state of_.

SECOND: the proposed articles of incorporation shall be attached hereto as exhibit A.

THIRD: within 7 days after the issuance of the Corporation’s certificate of incorporation, the parties agreed that the corporations authorized stock shall be distributed, and consideration paid as follows:

  1. _________shares of_______ [insert common or preferred] stock shall be issued to________________ in consideration of his/her payment to the Corporation of_dollars cash.
  2. _________Shares of stock shall be issued to____________in consideration of his/her transfer to the corporation of_________________ [list property, real or personal, to be transferred].
  3. __________ Shares of stock shall be issued to________________ in consideration of his transfer to the corporation of__________________.
  4. Etc. etc.

FOURTH: the Corporation shall employ__________ as its manager for a term of______________ years and at a salary of____________ per annum, such employment not to be terminated without cause and such sadly not be increased or decreased without the approval of__________ percent of the directors.

FIFTH: the parties agree not to transfer, sell until the 1st offer them for sale to the Corporation,, assign, pledge or dispose of the shares and then, should the corporation refused, on a pro rata basis 2 other shareholders,. The shares shall be offered at book value and in the event the corporation refuses, the other shareholders shall have 30 days to purchase the shares. If the Corporation or other shareholders do not purchase all the offered shares, the remaining shares may be transferred by their own and without price restrictions.

SIXTH: the parties to this agreement promised to use their best efforts to incorporate the organization and to commence its business.

_______________, _______________, __________________.

Setting Up An S Corporation

What is an S Corporation and How it Differs from a Conventional C Corporation

A business structure known as the S corporation is more attractive to small-business owners than a conventional corporation which is also known as C Corporation. An S corporation has more tax benefits as compared to a conventional corporation. With an S Corporation the income and losses are passed through to the shareholders and included on their individual tax turns. This is similar to the kind of tax arrangement you find in a partnership. At the same time you enjoy the liability protection of a conventional Corporation by having a separate legal identity for the business.

In addition, owners of S corporation can use the cash method of accounting when they don’t have inventory which is simpler than the accrual method. Under this method income is taxable well-received and expenses are deductible when paid.

An S corporation is allowed to have up to 100 shareholders. This works to the benefit of a small business sense it makes it easier for the business owner to raise funding. This is an obvious advantage as compared to a partnership or a sole proprietorship. You can raise more capital, attract more investors with an S Corporation.

However there are some disadvantages to setting up an S corporation as well. The one major disadvantage is that many of the rules and regulations as well as the paperwork and let the documentation that is required for conventional C Corporation, applies to S corporation as well.

This means that the cost of setting up an S corporation is rather high as well. You will have to pay a higher fee to get legal advice as well as to maintain the legal and accounting system for the business. An S corporation is required to file articles of incorporation, hold directors and shareholders meetings, keep corporate minutes and allow shareholders to vote on major business decisions.

Another major difference between a regular C Corporation and an S corporation is that S corporations can only issue one class of stock. This can hinder the company’s potential to raise funding to a certain degree.

Also, unlike a regular C Corporation, S corporation stock can be owned by individuals, estates and certain types of trusts.

Setting Up a Corporation

How to Incorporate a Business

Setting up a corporate legal structure for business is more complex and expensive than any other kind of business. One of the main features of the Corporation is that the corporation has its own legal identity which is separate from that of the business owner. For this reason the process of setting up the corporate identity needs a more complicated process for compliance with regulations and tax requirements.

The biggest outcome of setting up legal structure for an incorporated business is that of liability protection. Since the business has a separate legal identity, the debt of the business and corporation is not considered that of the owner. Technically speaking, you are not going to be held personally liable with your own personal assets of the debts and legal claims of the Corporation. A corporation can also retain some of its profit without the owner paying income tax on them.

You will probably experience ease with finding funding for business when it is set up as a corporation. Not only does borrowing money from banks and lending institutions become easier but other options for raising money also open up such as selling stock, either common or preferred. A corporation can also continue indefinitely and does not have to cease or dissolve with the death of a shareholder or if the shareholder sells the shares or becomes otherwise nonfunctional.

The laws governing the setup of the Corporation may differ from one state to another. You will most definitely need the assistance and professional help of an attorney to set up a corporation. In order to set up Corporation one must follow more complex rules and regulations than a partnership or sole proprietorship. It also requires adherence to guidelines regarding accounting and tax preparation. For all these reasons the cost of creating a Corporation is quite high.

Another drawback to setting up a corporation is that the owners of the corporation have to pay a double tax on business earnings. Earnings of the Corporation are subject to corporate income tax at both the federal and state levels but any earnings distributed to the shareholders in, dividends are also taxed at the individual level on their personal income tax returns.

One strategy that can be adapted to soften the blow of double taxation is to pay some money out as salary to you and other major corporate shareholders work for the company. A corporation is not required to pay tax on earning paid as reasonable compensation and can deduct the payments as business expense. However, the Internal Revenue Service set limits and regulations on what it considers to be reasonable compensation.