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Mitchell Law Office, LLC |
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Business Entities |
A "business entity" is the legal term for an artificial entity such as a corporation or a limited liability company ("LLC").
Why should I form one? If you are engaged in any type of business and have taken no formal steps, you are likely considered a "sole proprietor." A substantial issue with sole proprietors is that you have personal liability for all of your business liabilities. In other words, if someone sues your business, they are actually suing you personally. If more than one person is operating the business, then they are a partnership whether they think so or not. (A partnership for a single purpose is sometimes called a joint venture). A general rule of law is that partners are jointly and severally liable for the partnership obligations. Thus, if your partner obligates the partnership to a substantial debt and then fails to pay it, you will likely be liable for that debt. These liability issues are a primary motivation for many people to form a corporation or LLC. When you operate your business through a formal business entity, then your personal assets are generally not subject to claims by business creditors. Of course, that is a general rule and there are exceptions to it. One of the most common exceptions is when a creditor requires you to sign a personal guaranty (a material supplier or a bank are common examples). How do I decide which one is right for my business? Most people chose either a corporation or an LLC. From a "limited liability" standpoint, there is not a great deal of legal distinction between them. From a tax standpoint, there can be differences. Since our office does not provide tax advice, you will need to involve your CPA in this decision. Starting a business without having a CPA is like starting a business without an attorney: It can be done, but there is risk that you may miss some important issues. Although there are other types of entities, corporations and LLCs tend to be the most common ones. If you are interested in a different type of entity such as a limited liability partnership or a nonprofit corporation, you should consult with competent legal counsel before making that choice. How do I form one? Both corporations and LLCs are formed by filing Articles with the Secretary of State. Many (if not most) companies use the form Articles available from the Secretary of State (link to website). For a corporation, you file Articles of Incorporation; for an LLC, you file Articles of Organization. As part of being a corporation or LLC, you must have a Registered Agent. That is a live person with a physical address (not a PO Box). If someone wants to serve legal papers on the company, they can do so by serving the Registered Agent. Once the Articles are filed, you need to complete other documentation in order to properly set up your new business entity. For a corporation, those include Bylaws, Subscription Agreements, Organizational Meeting Minutes, and (for corporations with multiple shareholders), a Buy-Sell Agreement (sometimes called a Shareholder Agreement). For an LLC, the documents include an Operating Agreement and Organizational Meeting Minutes. Another step that must be taking is to apply for an Employers Identification Number from the IRS. Your CPA can help you with that application. Once it is formed, do I need to do anything else? Oregon law (and the law of most states) requires corporations to hold at least annual meetings of the shareholders and directors and to keep written minutes of those meetings. Although there is no similar statutory requirement for an LLC, I strongly recommend that they also hold annual meetings with written minutes. The written minutes should cover not only the regular operations of the company (names of owners and officers, salary and bonus payments, and other regular information) but should also cover any special events. Special events can include the transfer of any ownership interests, changes in the company's banking relationships, and loans between owners and the company. Also, the Secretary of State requires every business entity to file an annual report and pay an annual fee in order to stay in "active" status with that agency. The failure to file those reports and pay those fees will result in the agency administratively dissolving the company. Corporations may decide they want to elect to be an "S corporation." That is an IRS designation that is made by filing paperwork with that agency. Your CPA can help you decide whether your wish to make that election. Not making the "S corp" election means that the corporation will be considered a "C corporation," which has different tax consequences. This election does not apply to LLCs. The above steps cover only the formation of the business entity and its most basic operating steps. They do not address issues such as business licenses, contractor licenses, or other similar regulatory requirements. If I'm no longer operating the business, do I need to do anything special? When you decide to close down the business, you need to do so in an orderly fashion. One of the biggest issues is distribution of the company's remaining assets. You should work closely with your CPA to ensure that all creditors are fairly dealt with. Personal liability can arise if you distribute company assets to the company owners without treating creditors properly. The business laws of most states allow a company to give publication notice to unknown creditors. Doing so can limit the company's liability to any unknown creditors. Another step is to consider filing Articles of Dissolution. As noted above, the failure to pay the annual fees to the Secretary of State will result in administrative dissolution of the company. However, it can take a year or more for that to occur. Filing your own Articles allows you to control the date of public notice of the dissolution. |