Whether you are an established sole proprietor or starting a new business, it is important that you structure your business properly, ideally at the very beginning. There are many options available for forming a business and the best option for your company depends on your circumstances and objectives. Tax considerations also influence the type of entity structure that will best meet your situation and circumstances.
Each structure has its unique qualities. Every business owner should have an experienced business planning attorney evaluate their situation and recommend the appropriate structure and prepare the necessary documents to form the structure to meet their objectives.
If your company is important to you, you need to take the steps to set it up for success, starting with its formation.
LIMITED LIABILITY COMPANY
The limited liability company (LLC) structure is popular because it offers the same liability protection as a corporation while offering more flexibility and requiring less formality. The Members of the LLC are the owners. The LLC can be member-managed or manager-managed and can also have officers (President, Vice President, Treasurer, and Secretary) if desired. The LLC is not required to have annual meetings to keep up its formalities. The LLC structure is a great structure for both solo entrepreneurs and companies with multiple owners. It can be taxed as either a disregarded entity, a C-corporation, or an S-corporation. Multi-member LLCs can be taxed as a partnership.
SERIES LIMITED LIABILITY COMPANY
The series limited liability company (SLLC) structure provides for the creation of separate, independent series within the SLLC. Each series holds its own assets and has its own liabilities associated with those assets. If a series receives a judgment against it, the judgment is limited to the assets owned by that specific series, insulating the assets owned by the other series from liability associated with the series with the judgment against it. The SLLC structure is ideal for business owners who own multiple real properties and wish to protect the other properties from the liability associated with any one particular property without having to form separate LLCs to own each property.
Corporations are a traditional structure that has been around longer than LLCs. They can be formed as either for-profit or non-profit and can be taxed as either C-Corporations or S-Corporations. Their owners are referred to as Shareholders. The main decision-makers of a corporation are the directors and the officers (President, Vice President, Treasurer, and Secretary) who carry out the operations of the corporation. Corporations require annual meetings documented by written minutes.
Certain professionals, including physicians, accountants, and lawyers, are required to form their entity as a professional entity. Professional entities include professional limited liability companies (PLLC), professional associations (PA), and limited liability partnerships (LLP). These entities must be owned by professionals only and can be taxed either as a disregarded entity, a C-corporation, an S-corporation, or a partnership, depending on the number of owners.
A Limited Partnership (LP or Ltd) consists of one or more general partners and one or more limited partners. General partners have active management responsibilities and are liable for their actions. Limited partners do not have active management responsibilities and have no personal liability. Oftentimes the general partner is structured as an LLC to allow it to maintain limited liability. This structure is ideal for families that want to keep family assets managed together and to provide asset protection for those assets.
TRANSFER RESTRICTIONS AND BUY SELL PROVISIONS
Regardless of the company structure you choose, if the company has more than one owner, other than a married couple, it is imperative that the governing documents contain both restrictions on the transfer of ownership and provisions requiring owners to sell upon the occurrence of certain events.
Restrictions on transfer of ownership provide that an owner of an interest in the company, whether represented by membership interest, stock, or partnership interest, cannot unilaterally transfer his or her ownership interest to just any third party for any reason. This is important because the other business owners in the company may not want to be forced to be in business with just any third party without having some say in who that party is. The provision can be structured to allow transfer to certain persons, such as other owners or family members, or under certain circumstances, such as only with the permission of the other owners or only after offering the other owners a first right of refusal, depending how the client wants to structure.
Buy-sell provisions require an owner to sell or, in some cases, offer to sell their interest to the company or to the other owners of the company under certain circumstances, such as death or incapacity. The provisions could provide that in the event an owner dies, the person inheriting the ownership interest from the deceased owner is required to sell the deceased owner’s interest back to the company and the company is required to purchase the interest at a certain price and on certain terms. Similar provisions could require an owner who becomes incapacitated and is no longer able to work in the company to sell his or her interest back to the company. This allows the ownership to remain among the remaining owners and compensates the deceased owner’s estate or the incapacitated owner, as applicable, for the interest being sold back to the company.
MINORITY & WOMEN-OWNED BUSINESS CERTIFICATIONS
If a certain percentage of the ownership (typically 51%) and control of a company is held by a minority or a woman, the company may qualify for a minority or women-owned business certification, such as the Historically Underutilized Business (HUB) Certification, the Women-Owned Business (WBE) Certification, the Minority-Owned Business (MBE) Certification, the Disadvantaged Business Enterprise (DBE) Certification, and the Small Business Enterprise (SBE) Certification. These certifications can provide business opportunities for businesses providing services to governmental entities and large corporations who set aside a certain number of contracts to businesses with these certifications. They can also be used for marketing purposes to attract more business to the company.
LET’S DISCUSS YOUR OPTIONS
Let an experienced business planning attorney listen to you as you describe your facts and your goals and help you decide what option best meets your objectives. Call us today at 409-257-7878 to schedule a consultation. You can also contact us by clicking here.