Frequently Asked Questions About Corporations & Limited Liability Companies
Should I choose a Corporation or Limited Liability Company for my business?
The type of business entity that you choose to form depends upon many different factors. The most important of these factors relate to taxation. Which form is right for your business venture can only be ascertained after having discussed the particulars of your situation with your accountant or tax advisor.
What types of corporations are available?
We offer six standard varieties of “for profit” corporations. The first is a standard corporation the second is a statutory close corporation with a board of directors; and the third is a statutory close corporation without a board of directors. The fourth, fifth and sixth options are “professional corporation” versions of the first three options. Certain professions are required by state law to be organized under the professional corporation statutes. Any of the above can be taxed by the IRS as a C-corporation or as an S-corporation. The tax classification is established after the corporation has been formed.
What types of Limited Liability Companies are available?
We offer five standard varieties of Limited Liability Companies (LLCs). A LLC may or may not have managers. If the LLC has one or more members, the Members generally elect the Managers, who make company decisions, carry out company decisions, and take care of day to day business. A LLC can also be set up with a permanent Manager that cannot be voted out of office.
The first type of LLC is “Single Member” Managed. It is designed for a limited liability company that will have only one member for the foreseeable future. A new Operating Agreement must be prepared when any new members are admitted.
The second is “Member Managed”, which is generally used when the owners (members) are all involved in the day-to-day operations of the business and want to make company decisions. It is designed like a simple partnership with no centralized management.
The third is “Elected Manager” with the manager being elected from time to time by the members. This variety is used when some owners will not be involved in the operation of the business but want to elect one or more persons (a manager or managers) who will make decisions and run the business. This form is also helpful when the members are companies instead of individuals.
The fourth has an “All Powerful Manager”, much like a limited partnership. This form of LLC applies where one member wants to maintain decision-making power without allowing other members to elect another manager. This often occurs when a business owner may want to share some of the business profits, but not share control of the business. Members that are not managers may be subject to or entitled to passive tax treatment, as the case may be. You should consult your tax advisor before using this type of limited liability company.
A fifth kind of LLC is a “Corporate Style” LLC with shares. This form of LLC is used to mimic the operation of a corporation but be governed by LLC laws. It is the most convenient form of LLC to use when you anticipate adding members over a relatively short period of time. Ownership percentages are determined by the number of shares owned and not by capital contribution.
Are there any other types of business entities that I can choose?
Yes. Although most businesses operate as corporations or LLCs, you can choose to do business in your own name. In that case, you are a Sole Proprietor and no paperwork is required. However, be aware that your liability is unlimited and you have a lesser ability to allocate the cash flow and assets of your business to take advantage of favorable tax treatment.
Additionally, several person can form a Partnership and do business under a Tradename. Liability is not limited in most circumstances and your ability to allocate cash flow and assets to take advantage of favorable tax treatment is substantially reduced. However, it is important to have a written Partnership Agreement in such a case to clearly define the rights and obligations of the partners.
Other, less common, types of entities are also available. We would be happy to discuss these with you on an individual basis.