© 2004 john s. herbrand, esq. legal entities for conducting business john s. herbrand, esq. one...
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LEGAL ENTITIES FORCONDUCTING BUSINESS
JOHN S. HERBRAND, Esq.ONE CHASE SQUARESUITE 1900ROCHESTER, NEW YORK 14604TEL: 585.295.1562FAX: [email protected]
The attached outline is a brief overview of certain business entities. In furnishing this outline, the author is providing information, not legal advice. Before choosing a business entity, you should seek advice from your attorney, accountant and other professionals.
BUSINESS ENTITIES
1. SOLE PROPRIETORSHIP
2. PARTNERSHIP GENERAL LIMITED
3. CORPORATION “C” corporation “S” corporation
4. LIMITED LIABILITY COMPANY (LLC)
FACTORS IN CHOOSING FORM OF BUSINESS ENTITY
1. Liability of owners2. Number of owners3. Taxation of entity and owners4. Cost of formation of entity5. Cost of maintenance of entity6. Management and control of entity7. Financing of company8. Exit strategy
Sale of business Retirement Estate issues
SOLE PROPRIETORSHIP
Single individual owning and operating a business
ADVANTAGES: SIMPLE AND INEXPENSIVE TO FORM AND MAINTAIN
PROFIT AND LOSSES PASS DIRECTLY TO OWNER
DISADVANTAGES: UNLIMITED PERSONAL LIABILITY
TERMINATION AT DEATH
DIFFICULT TO TRANSFER INTEREST
HOW TO START: OBTAIN ANY REQUIRED LICENSES
FILE CERTIFICATE OF ASSUMED NAME IF NOT OPERATING UNDER OWN NAME
FILE SS-4 WITH IRS FOR E.I.N. IF YOU WILL HAVE EMPLOYEES
OBTAIN BUSINESS INSURANCES DESIRED
GENERAL PARTNERSHIP
A partnership is an association of two or more persons to carry on as co-owners a business for profit
ADVANTAGES: FEW STATUTORY FORMALITIES INEXPENSIVE TO MAINTAIN PROFIT AND LOSSES PASS DIRECTLY TO OWNER
DISADVANTAGES: WRITTEN AGREEMENT NOT NECESSARY ALL PARTNERS HAVE EQUAL VOICE AND ARE AGENTS OF THE PARTNERSHIP DIFFICULT TO TRANSFER INTEREST TERMINATION UPON DEATH OR WITHDRAWAL OF PARTNER UNLESS OTHERWISE PROVIDED IN PARTNERSHIP AGREEMENT UNLIMITED LIABILITY FOR ALL PARTNERS
HOW TO START: ENTER INTO PARTNERSHIP AGREEMENT (NOT REQUIRED BUT STRONGLY ADVISED) FILE SS-4 WITH IRS FOR E.I.N. OBTAIN ANY REQUIRED LICENSES MUST FILE CERTIFICATE OF ASSUMED NAME OBTAIN BUSINESS INSURANCES DESIRED
BEWARE of “CONSTRUCTIVE” PARTNERSHIPS!
LIMITED PARTNERSHIP
A limited partnership is a partnership formed by two or more persons under the provisions of the New York State Partnership Law, having as members one or more general partners and one or more limited partners.
ADVANTAGES:FEW STATUTORY FORMALITIES INEXPENSIVE TO MAINTAINPROFIT AND LOSSES PASS DIRECTLY TO OWNERLIMITED LIABILITY FOR LIMITED PARTNERS
DISADVANTAGES:UNLIMITED LIABILITY FOR GENERAL PARTNERSLIMITED PARTNERS CANNOT TAKE PART IN MANAGEMENT OF BUSINESSEXPENSIVE TO FORMDIFFICULT TO TRANSFER INTERESTTERMINATION UPON DEATH OR WITHDRAWAL OFPARTNER UNLESS OTHERWISE PROVIDED IN PARTNERSHIP AGREEMENTUNLIMITED LIABILITY FOR ALL GENERAL PARTNERS
HOW TO START:ENTER INTO LIMITED PARTNERSHIP AGREEMENT FILE CERTIFICATE OF LIMITED PARTNERSHIPPUBLISH NOTICE OF FORMATIONCERTIFICATE OF ASSUMED NAME NOT REQUIRED UNLESS OPERATING UNDER DIFFERENT NAMEFILE SS-4 WITH IRS FOR E.I.N.ESTABLISH SEPARATE BANKING AND ACCOUNTINGOBTAIN ANY REQUIRED LICENSESOBTAIN BUSINESS INSURANCES DESIRED
“C” CORPORATIONS
A statutory legal entity which exists as a legal person separate and distinct from its shareholders
ADVANTAGES: ENTITY SEPARATE AND DISTINCT FROM ITS SHAREHOLDERS PERPETUAL EXISTENCE LIMITED LIABILITY FOR SHAREHOLDERS
EXCEPTIONS: PERSONAL GUARANTEES; 10 LARGEST SHAREHOLDERS LIABLE FOR UNPAID WAGES; RESPONSIBLE OFFICERS CAN BE LIABLE FOR UNPAID EMPLOYMENT AND SALES TAXES
DIVISIBILITY AND TRANSFERABILITY OF INTERESTS FORMAL AND FAMILIAR STRUCTURE FOR BUSINESS OPERATIONS
DISADVANTAGES: CORPORATE AND INDIVIDUAL LEVEL TAXES EXPENSIVE TO FORM AND MAINTAIN STATUTORY REQUIREMENTS MUST HONOR FORMALITIES ANNUAL STATE FRANCHISE TAX - $100 MINIMUM
HOW TO START: FILE CERTIFICATE OF INCORPORATION OBTAIN CORPORATE “KIT” DRAFT AND ADOPT BY-LAWS ISSUE SHARES HOLD SHAREHOLDERS MEETING AND ELECT BOARD OF DIRECTORS HOLD DIRECTORS MEETING AND ELECT OFFICERS FILE SS-4 WITH IRS FOR E.I.N. ESTABLISH SEPARATE BANKING AND ACCOUNTING OBTAIN ANY REQUIRED LICENSES OBTAIN BUSINESS INSURANCES DESIRED
“S” CORPORATIONS
A statutory legal entity which exists as a legal person separate and distinct from its shareholders
ADVANTAGES: SAME ADVANTAGES AS FOR “C” CORPORATIONS INDIVIDUAL LEVEL TAXES ONLY PROFIT AND LOSSES PASS DIRECTLY TO OWNER
DISADVANTAGES: SAME DISADVANTAGES AS FOR “C” CORPORATIONS RESTRICTIONS ON TYPE AND NUMBER OF SHAREHOLDERS ONLY ONE CLASS OF SHAREHOLDER CANNOT HAVE ANOTHER CORPORATION AS SHAREHOLDER
HOW TO START: SAME AS FOR “C” CORPORATIONS FILE FORM 2553 WITH IRS
LIMITED LIABILITY COMPANIES
An unincorporated statutory legal entity which exists as a legal person separate and distinct from its members
ADVANTAGES: LIMITED LIABILITY FOR ALL MEMBER,INCLUDING MANAGERS PROFIT AND LOSSES PASS DIRECTLY TO OWNER IF SO ELECTED MULTIPLE CLASSES OF MEMBERSHIP PERMITTED NO RESTRICTIONS ON TYPES OR NUMBER OF MEMBERS PERPETUAL EXISTENCE UNLESS OTHERWISE AGREED
DISADVANTAGES: EXPENSIVE TO FORM AND MAINTAIN NO EXTENSIVE BODY OF CASE LAW ANNUAL ASSESSMENT IN LIEU OF FRANCHISE TAX; MINIMUM $100
HOW TO START: FILE ARTICLES OF ORGANIZATION PUBLISH ARTICLES OF ORGANIZATION ENTER INTO OPERATING AGREEMENT OBTAIN LLC “KIT” FILE SS-4 WITH IRS FOR E.I.N. FILE FORM 8832 WITH IRS ESTABLISH SEPARATE BANKING AND ACCOUNTING OBTAIN ANY REQUIRED LICENSES OBTAIN BUSINESS INSURANCES DESIRED
ALTERNATIVE TO STARTING A BUSINESS
BUY A BUSINESS!
ADVANTAGES: PROVEN TRACK RECORD EXISTING CUSTOMER BASE
DISADVANTAGES: MORE COSTLY POTENTIAL ASSUMPTION OF UNKNOWN RISKS
OTHER CONSIDERATIONS
DOING BUSINESS IN OTHER STATES
TRADE/SERVICE MARKS
EMPLOYEE ISSUES