LLC, PARTNERSHIP AND CORPORATIONS
List the general requirements of an LLC, partnership and
corporation.
Limited Liability Company
A limited liability company is a hybrid type of legal structure that provides the
limited liability features of a corporation and the tax efficiencies and operational
flexibility of a partnership.
The "owners" of an LLC are referred to as "members." Depending on the state, the
members can consist of a single individual (one owner), two or more individuals,
corporations or other LLCs.
Unlike shareholders in a corporation, LLCs are not taxed as a separate business
entity. Instead, all profits and losses are "passed through" the business to each
member of the LLC. LLC members report profits and losses on their personal
federal tax returns, just like the owners of a partnership would
Forming an LLC
While each state has slight variations to forming an LLC, they all adhere to some
general principles:
Choose a Business Name. There are 3 rules that your LLC name needs to follow:
(1) it must be different from an existing LLC in your state, (2) it must indicate that
it's an LLC (such as "LLC" or Limited Company") and (3) it must not include
words restricted by your state (such as "bank" and "insurance"). Your business
name is automatically registered with your state when you register your business,
so you do not have to go through a separate process
File the Articles of Organization. The "articles of organization" is a simple
document that legitimizes your LLC and includes information like your business
name, address, and the names of its members. For most states, you file with the
Secretary of State. However, other states may require that you file with a different
office such as the State Corporation Commission, Department of Commerce and
Consumer Affairs, Department of Consumer and Regulatory Affairs, or the
Division of Corporations & Commercial Code. Note: there may be an associated
filing fee.
Create an Operating Agreement. Most states do not require operating
agreements. However, an operating agreement is highly recommended for multi-
member LLCs because it structures your LLC's finances and organization, and
provides rules and regulations for smooth operation. The operating agreement
usually includes percentage of interests, allocation of profits and losses, member's
rights and responsibilities and other provisions.
Obtain Licenses and Permits. Once your business is registered, you must obtain
business licenses and permits. Regulations vary by industry, state and locality. Use
the Licensing & Permits tool to find a listing of federal, state and local permits,
licenses and registrations you'll need to run a business.
Hiring Employees. If you are hiring employees, It must adhere to federal and state
regulations for employers.
Announce Your Business. Some states, including Arizona and New York, require
the extra step of publishing a statement in your local newspaper about your LLC
formation.
Advantages of an LLC
Limited Liability. Members are protected from personal liability for
business decisions or actions of the LLC. This means that if the LLC incurs
debt or is sued, members' personal assets are usually exempt. This is similar
to the liability protections afforded to shareholders of a corporation. Keep in
mind that limited liability means "limited" liability - members are not
necessarily shielded from wrongful acts, including those of their employees.
Less Recordkeeping. An LLC's operational ease is one of its greatest
advantages. Compared to an S-Corporation, there is less registration
paperwork and there are smaller start-up costs.
Sharing of Profits. There are fewer restrictions on profit sharing within an
LLC, as members distribute profits as they see fit. Members might
contribute different proportions of capital and sweat equity. Consequently,
it's up to the members themselves to decide who has earned what percentage
of the profits or losses.
Disadvantages of an LLC
Limited Life. In many states, when a member leaves an LLC, the business
is dissolved and the members must fulfill all remaining legal and business
obligations to close the business. The remaining members can decide if they
want to start a new LLC or part ways. However, you can include provisions
in your operating agreement to prolong the life of the LLC if a member
decides to leave the business.
Self-Employment Taxes. Members of an LLC are considered self-
employed and must pay the self-employment tax contributions towards
Medicare and Social Security. The entire net income of the LLC is subject to
this tax.
Partnership
A partnership is a single business where two or more people share ownership.
Each partner contributes to all aspects of the business, including money, property,
labor or skill. In return, each partner shares in the profits and losses of the business.
Because partnerships entail more than one person in the decision-making process,
it’s important to discuss a wide variety of issues up front and develop a legal
partnership agreement. This agreement should document how future business
decisions will be made, including how the partners will divide profits, resolve
disputes, change ownership (bring in new partners or buy out current partners) and
how to dissolve the partnership. Although partnership agreements are not legally
required, they are strongly recommended and it is considered extremely risky to
operate without one.
Types of Partnerships--------
There are three general types of partnership arrangements:
General Partnerships=assume that profits, liability and management duties
are divided equally among partners. If you opt for an unequal distribution,
the percentages assigned to each partner must be documented in the
partnership agreement.
Limited Partnerships=(also known as a partnership with limited liability)
are more complex than general partnerships. Limited partnerships allow
partners to have limited liability as well as limited input with management
decisions. These limits depend on the extent of each partner’s investment
percentage. Limited partnerships are attractive to investors of short-term
projects.
Joint Ventures=act as general partnership, but for only a limited period of
time or for a single project. Partners in a joint venture can be recognized as
an ongoing partnership if they continue the venture, but they must file as
such.
Forming a Partnership------------------
To form a partnership, you must=register your business=with your state, a
process generally done through your Secretary of State’s office.
You’ll also need to establish your=business name. For partnerships, your
legal name is the name given in your partnership agreement or the last
names of the partners. If you choose to operate under a name different than
the officially registered name, you will most likely have to file a=fictitious
name=(also known as an assumed name, trade name, or DBA name, short for
"doing business as").
Once your business is registered, you must obtain business=licenses and
permits. Regulations vary by industry, state and locality.
Advantages of a Partnership
Easy and Inexpensive.=Partnerships are generally an inexpensive and easily
formed business structure. The majority of time spent starting a partnership
often focuses on developing the partnership agreement.
Shared Financial Commitment.=In a partnership, each partner is equally
invested in the success of the business. Partnerships have the advantage of
pooling resources to obtain capital. This could be beneficial in terms of
securing credit, or by simply doubling your seed money.
Complementary Skills.=A good partnership should reap the benefits of
being able to utilize the strengths, resources and expertise of each partner.
Partnership Incentives for Employees.=Partnerships have an employment
advantage over other entities if they offer employees the opportunity to
become a partner. Partnership incentives often attract highly motivated and
qualified employees.
Disadvantages of a Partnership---------
Joint and Individual Liability.=Similar to sole proprietorships, partnerships
retain full, shared liability among the owners. Partners are not only liable for
their own actions, but also for the business debts and decisions made by
other partners. In addition, the personal assets of all partners can be used to
satisfy the partnership’s debt.
Disagreements Among Partners.=With multiple partners, there are bound
to be disagreements Partners should consult each other on all decisions,
make compromises, and resolve disputes as amicably as possible.
Shared Profits.=Because partnerships are jointly owned, each partner must
share the successes and profits of their business with the other partners. An
unequal contribution of time, effort, or resources can cause discord among
partners.
Corporation
Corporation (C Corporation)
A corporation (sometimes referred to as a C corporation) is an independent legal
entity owned by shareholders. This means that the corporation itself, not the
shareholders that own it, is held legally liable for the actions and debts the business
incurs.
Corporations are more complex than other business structures because they tend to
have costly administrative fees and complex tax and legal requirements. Because
of these issues, corporations are generally suggested for established, larger
companies with multiple employees.
For businesses in that position, corporations offer the ability to sell ownership
shares in the business through stock offerings. “Going public” through an initial
public offering (IPO) is a major selling point in attracting investment capital and
high quality employees.
Forming a Corporation
A corporation is formed under the laws of the state in which it is registered. To
form a corporation you’ll need to establish your=business name and register your
legal name with your state government. If you choose to operate under a name
different than the officially registered name, you’ll most likely have to file a
fictitious name (also known as an assumed name, trade name, or DBA name, short
for "doing business as"). State laws vary, but generally corporations must include a
corporate designation (Corporation, Incorporated, Limited) at the end of the
business name.
To=register your business=as a corporation, you need to file certain documents,
typically articles of incorporation, with your state’s Secretary of State office. Some
states require corporations to establish directors and issue stock certificates to
initial shareholders in the registration process.=Contact your state business entity
registration office=to find out about specific filing requirements in the state where
you form your business.
Once your business is registered, you must obtain business licenses and permits.
Regulations vary by industry, state and locality.
Advantages of a Corporation
Limited Liability.-When it comes to taking responsibility for business debts
and actions of a corporation, shareholders’ personal assets are protected.
Shareholders can generally only be held accountable for their investment in
stock of the company.
Ability to Generate Capital.=Corporations have an advantage when it
comes to raising capital for their business - the ability to raise funds through
the sale of stock.
Corporate Tax Treatment.=Corporations file taxes separately from their
owners. Owners of a corporation only pay taxes on corporate profits paid to
them in the form of salaries, bonuses, and dividends, while any additional
profits are awarded a corporate tax rate, which is usually lower than a
personal income tax rate.
Attractive to Potential Employees.=Corporations are generally able to
attract and hire high-quality and motivated employees because they offer
competitive benefits and the potential for partial ownership through stock
options.
Disadvantages of a Corporation
Time and Money.=Corporations are costly and time-consuming ventures to
start and operate. Incorporating requires start-up, operating and tax costs that
most other structures do not require.
Double Taxing.=In some cases, corporations are taxed twice - first, when the
company makes a profit, and again when dividends are paid to shareholders.
Additional Paperwork.-Because corporations are highly regulated by
federal, state, and in some cases local agencies, there are increased
paperwork and recordkeeping burdens associated with this entity.
2. Find an example of a business organization that is an LLC. Discuss why this
company would prefer to be formed as an LLC instead of a partnership or a
corporation.
A) Bridgestone Retail Companies is an LLC. The advantages that Bridgestone has
in being an LLC is that you have limited liability for the debts and other business
obligations but you still are able to participate in the management of the company.
An LLC is also one of the easiest types of companies to form usually used for
small businesses but not always. An LLC is better than a partnership and a
corporation because in a partnership you are liable for all of the legal obligations
and debts of the company. So for example if your business was to fail you would
have to still pay back all of the money you took out to start the company. Also a
corporation is much more complicated to run, there are a lot of extra things you
need to do on the paperwork side, such as a much more difficult tax return.
B) I chose Benetech LLC, according to their website, “Benetech has served as the
project management leader of choice for a broad range of public and private
entities, including major hospitals, casinos, school systems, and leading companies
on the Gulf Coast, as well as for federal, and Louisiana state and local agencies”.
http://www.gobenetech.com/aboutl. Advantages of Benetech forming an LLC
could include, the owners not being completely liable for the businesses debts,
such as in a partnership or double taxation (tax on the income the owner withdraws
as well as tax on the company) such as in a corporation. Funds may be raised easier
than in a partnership but not as easy as a corporation. Benetech’s owners would be
able to fund more projects for the gulf coast than a partnership while not paying as
much tax on their personal income if they created a corporation.
