CHOOSING A FORM OF BUSINESS ENTITY
While not required to legally operate a business, many small business owners elect to form a separate legal entity to protect their personal assets from debts incurred in the operation of the business. For most small business owners, a limited liability company offers protection from liability with less paperwork. For others, a corporation makes more sense. Before filing any documents with the state, small business owners should consult with an attorney and accountant to decide which form of business entity is right for them.
Corporation
A corporation is a separate legal entity from its shareholders. Although there is the possibility of double taxation, most small business owners elect pass-through treatment by filing a subchapter-S election with the Internal Revenue Service. A subchapter-S corporation may have up to 75 individual shareholders, who all must be US residents. Shareholders are generally not liable for debts of the corporation. A corporation is formed by filing Articles of Incorporation with the Secretary of State. It is run by a board of directors and director-appointed officers according to the company’s by-laws. Corporations have a perpetual life and are easily capitalized or sold through the sale of stock. Corporations can, with certain limitations, provide its owners with life and health insurance and retirement plans. State law requires corporations to hold annual meetings, adopt formal resolutions, and keep minutes of both. An annual report must also be filed with the Secretary of State. A professional corporation (PC) is used by companies that provide professional services licensed by the state.
Limited Liability Company
A limited liability company (LLC) is also a separate legal entity from its members. LLCs are similar to partnerships. Unlike partnerships, members are generally not liable for debts of an LLC. An LLC is formed by filing Articles of Organization with the Secretary of State. It may be run by a manager or its members. LLCs can have either a stated or perpetual life. LLCs with more than one member must have an operating agreement. Its owners can elect either partnership or subchapter-S corporate tax treatment with certain restrictions. Unlike subchapter-S corporations, LLCs can be owned by foreign residents and institutions. There are no required annual meetings, minutes, or reports. A professional limited liability company (PLLC) is used by companies that provide professional services licensed by the state.
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