A Limited Liability Company is a type of business organization that combines the pass-through taxation of a sole proprietorship with the limited liability of a corporation. An LLC is taxed like a sole proprietor, who must report gains and losses on their own personal tax returns, as the LLC is not a separate entity. However, the owner of the LLC cannot be held personally liable like a sole proprietor may be held liable, as LLC’s have a “corporate shelter.” This corporate shelter is not absolute; if the owner of an LLC commits a personal act that is negligent or illegal then the owner will be held liable. Contact us for any help with your Business Planning and Business Law.
A corporation is a company that is considered a legally independent entity. This means that the corporation is separated from the people who own, control, and manage the company. Corporate and tax law view a corporation as a pseudo-person that can be taxed, enter into contracts, and incur losses and gains. A corporation also shelters the people who own, control, and manage the company from liability. This means that if the corporation incurs a judgment against itself, the personal assets of the owners are protected. There are two main types of corporations: S Corporations and C Corporations.
An S corporation is a corporation that has chosen or “elected” to have a special tax status with the IRS. This S corporation election means that S corporations do not have to pay taxes at the business level. Instead, S corporations file a tax return but report any business gains or losses on the owners’ personal tax returns, which means the business taxes are paid on the individual level. This avoids the “double taxation” that C corporations usually have. Like a C corporation, S corporations have limited liability, which means the owners will not typically be held liable for the corporation’s wrongdoings. However, to form a S corporation, there must be less than 100 total owners who are all U.S citizens. The owners cannot be other C corporations, LLCs, certain trusts, S corporations, or partnerships.
C corporations are the most common type of corporation. Like an S corporation, a C corporation offers limited liability to its owners. C corporations can also have an unlimited number of owners and can thus raise capital more easily. However, C corporations may be subject to “double taxation,” which means that the corporation will file its own separate tax return (Form 1120) and pay a corporate tax rate. Additionally, if corporate income is distributed the business owners through dividends, then the owners could be taxed again on an individual level. C corporations also allow for business expenses to be more readily tax deductible, making them a better choice for start-up businesses that have a lot of owners.
A Non-Profit Corporation is a category of corporation that is tax-exempt. To qualify as a non-profit corporation, the corporation must be organized in a way that 1) benefits the public, 2) benefits a specific group of individuals, or 3) benefits the membership of the Non-Profit. Contrary to the name, a non-profit corporation can be for-profit; however, making a profit cannot be their sole purpose.
If you own a business in the United States, you will need to have a registered agent, or statutory agent, that is designated to receive service of process. Service of process is the notification process that occurs when a business is a party to a legal action. While most business entities, like a corporation, are viewed as a pseudo-individual under the law, process cannot be served to a business. Thus, the business must elect an agent to receive service, so that the claim can move forward in court. If you need more state specific information about statutory agents, go to your state’s Sectary of State website for more information. If you are an Ohio business entity, Ohio’s statutory information can be found here, as well as the forms.
To form an LLC, you will first need to register your LLC with your state’s Secretary of State. After you file your LLC information with your state, you will need to contact the IRS for an Employer Identification Number (EIN). You will use this EIN to open a business bank account and file your business’s taxes. You will also need to contact your state’s Taxation Department to find out what tax obligations you will owe. In addition, you will need to prepare an Operating Agreement and business contracts. Finally, you will need to obtain the proper permits and licenses to operate your business. States differ on how exactly an LLC is filed, so it is best to find a Business Planning Attorney to help you along the filing process. If you are located in Ohio, Attorney Jacqueline MacLaren would to help you!
Forming a corporation has similar steps to forming an LLC. First, you must file articles of incorporation with your state’s Secretary of State. After filing the appropriate forms, you will need to create bylaws for your corporation to operate under. Once the bylaws are created, the Board of Directors may have their first meeting, stock certificates may be issued to the owners, and any other permits may be obtained to operate your business. It is highly suggested you contact an experienced Business Attorney to help you file your incorporation documents.
There are 5 main points you need to consider when choosing an organizational structure for your business, as well as other considerations that are unique to you. The five main points for you to consider include:
• Tax Preferences
• Capitalization of the Business
• If you plan to issue and trade stock
• The Management Structure of your Business
Liability and tax preferences are the main reason people choose LLC’s or corporations over sole proprietorship. A business or corporate law attorney will be able to help you choose which organizational structure suits your business best.
All three of these devices help protect intellectual property, but all three serve very different purposes. A copyright helps protect “original works of authorship” or rather the form of expression. However, the copyright does not protect the subject matter like a trademark or patent would. For example, a copyright would protect a picture or description of an ice cream sundae, but it would not prohibit others from making a similar ice cream sundae.
A trademark is developed to protect the words, phrases, and logos a company uses on its goods to indicate the source of the goods from other companies. This prevents other companies from using a confusingly similar word, phrase, or logo in the sale of their products. For example, if your company uses a penguin to advertise your ice cream sundaes, a trademark would prevent other companies from using a penguin to advertise their ice cream sundaes. However, a trademark would not prevent other companies from selling ice cream sundaes.
A patent is a grant of protection and property right to an inventor that has been issued by the Patent and Trademark Office. A patent is typically good for 20 years from the date on which the application for the patent is filed. For example, a patent would protect others from making your special ice cream sundae. Only you alone would be able to make your sundae, unless you sell your patent rights to another entity.
The kind of permits, licenses, and registrations you will need to operate is dependent about what kind of business you are in. The following are examples of different documents you may need to operate your business:
• Sales Tax License
• Zoning Permits
• Sellers Permit
• Health Department Permits
• Employer Identification Number (EIN)
A Limited Liability Partnership (LLP) is similar to a Limited Liability Company, in that the owners have limited liabilities. A Limited Liability Partnership must have more than one owner, but none of the owners need to be a general partner as in a Limited Partnership. LLPs are usually a good choice for professional groups, such as accountants or lawyers.
There are couple different ways to get your tax or employer identification number (EIN). These numbers are issued by the IRS. You may either call the IRS at 1-800-829-3676 and request a Business Tax Kit or you can go to the IRS website and file for your numbers online. You may need to contact an attorney or your accountant to assist you with the information needed to correctly apply for an EIN.
Any business with more than one shareholder or owner should consider a buy-sell agreement. If a shareholder or owner dies, divorces, becomes disabled, or is removed from employment, the business needs to be adequately prepared on what to do. A buy-sell agreement will provide a plan of action and minimize any problems that may pop up. Additionally, a buy-sell agreement can contain provisions to help limit who may become an owner of the business.
You do not technically need an attorney to prepare your contracts. However, using form contracts found on the internet or attempting to craft your own contracts may have serious implications if you fail to tailor the contract to your business’s needs. Only a qualified attorney will be able to help you draft contracts that help protect you from liability in your business dealings. Attorney fees may be expensive, but it is even more expensive to be sued for something you could’ve prevented.
This is a common question that comes up when a business may be found liable through vicarious liability. A business may be found liable for a tort claim if an act is committed by the business’s employee. However, a business will likely not be liable for an act done by an independent contractor. Typically, the main difference between an independent contractor and an employee is that an employee is hired to provide work on a regular basis and is subject to the control of the employer. An independent contractor is someone who contracts to provide specific work to a company according to the contract and is not subject to the same level of control as an employee. If you would like to know more about what classifies an employee versus an independent contractor, this chart may be helpful to you.
Many business owners do not think about what might happen to their business after they die. However, it is something that all business owners need to plan for. If you put your business into a will or do not draft any estate planning documents for your business, then your business will pass through probate court like all of your other assets. Your business will then be liquidated in a few short months and sold off, with the proceeds going to your beneficiaries. This process can be stressful for everyone involved, so it is recommended that business owners place their businesses in trusts. A trust will allow your business to continue if you like or provide a better plan to dissolve the business after your death. If you would like to know more about estate planning, check out our frequently asked questions about estate planning or contact Attorney Jacqueline MacLaren today.
Authored by: Mary E. Zoldak
Serving Columbus and Central Ohio
MacLaren Law LLC provides counsel for the estate and business planning needs of Columbus, Ohio and its surrounding communities, including: Bexley, Dublin, Upper Arlington, Worthington, Westerville, Pickerington, Pataskala, Delaware, Plain City, New Albany, Gahanna, Newark, Zanesfield, Marysville, Powell. MacLaren Law also serves Franklin, Delaware, Knox, Licking, Union, and Muskingum counties.