Which Business Legal Composition is Best?
We are not attorneys and the information posted here is not legal advice we recommend you speak with an attorney and your accountant before deciding if an LLC or other business legal composition is the best fit for you and your business.
The first step in starting a business is to determine the basic legal structure of the business, and to properly record the business name. This step is important when starting a business, since financial implications vary depending on which legal structure is selected. These range from corporation responsibilities for annual franchise tax fees to personal liability for business dealings as a sole proprietorship.
The business name selected is the identifying and marketing component of the business. It should be given much thought and consideration. A professional tax consultant, accountant, and/or attorney should always be consulted before determining legal structure and business name.
There are several legal structures available for businesses. Each structure is listed below with a brief description of the entity.
A sole proprietorship exists when a single individual operates a business and owns all assets. A sole proprietor is personally liable for all debts, and business ownership is nontransferable. Under a sole proprietorship, the life of the business is limited to the life of the individual proprietor. The sole proprietorship makes no legal distinction between personal and business debts, and it does not require a separate income tax return.
A sole proprietorship is often operated under the name of the owner. Whenever operating a business under a name other than the sole proprietor, an Assumed Name Certificate must be filed with the county clerk. Assumed Name Certificates are discussed later in this section.
A general partnership exists when two or more individuals or businesses join to operate a business. Under a general partnership, a separate business entity exists, but creditors can still look to the partners’ personal assets for satisfaction of debts. General partners share equally in assets and liabilities. A general partnership requires an annual partnership income tax return (separate from the partners’ personal returns). A general partnership may be operated under the names of the owners, or a different name. In either case, an Assumed Name Certificate must be filed with the county clerk.
A limited partnership is a partnership formed by two or more persons or entities, under the laws of each state, and having one or more general partners and one or more limited partners. General partners share equally in debts and assets, while limited partners have limited debt obligations. A limited partnership must be registered with the Secretary of State. (See next section for details on the business name.)
A registered limited liability partnership is a general partnership that has been registered with the Secretary of State. A partner’s liability in a registered limited liability partnership differs from that of an ordinary partnership. In a registered limited liability partnership, a partner is not individually liable, under some circumstances, for debts and obligations of the partnership arising from errors, omissions, negligence, incompetence, or malfeasance committed in the course of business by others in the partnership.
A corporation (Subchapter C or S) is created when two or more individuals, partnerships, or other entities join together to form a separate entity for the purpose of operating a business in the state. A corporation has its own legal identity, separate from its owners. The corporation offers protection to the business owners’ personal assets from debts and liabilities relating to the operation of the corporation. Taxation of the corporation varies depending on the type of corporation formed. A corporation must be registered with the Secretary of State.
A Subchapter C Corporation is taxed at a higher rate than an individual. The owners are not taxed personally for profits; however, the owners do pay personal taxes on any salaries and/or dividends, and the corporation is also taxed on the profits.
Owners of Subchapter S Corporations may deduct business losses on personal income tax returns, similar to a partnership. The Subchapter S Corporation also offers alternative methods for distributing the business income to the owners.
A limited liability company is an unincorporated business entity which shares some of the aspects of Subchapter S Corporations and limited partnerships, and yet has more flexibility than more traditional business entities. The limited liability company is designed to provide its owners with limited liability and pass-through tax advantages without the restrictions imposed on Subchapter S Corporations and limited partnerships. A limited liability company must be registered with the appropriate Secretary of State. Typically LLC’s require advertising to be placed to announce the creation and filing of such as business, and you need to discuss this with your attorney and accountant.
Once the legal structure of the business has been determined, and if a separate business name will be used, the business name must be registered with the county clerk’s office and/or the Secretary of State.
It is very important to do a thorough search when considering a business name. If a corporation and an unincorporated company have very similar names, neither automatically has the right to the name. If both parties have properly filed the Assumed Name Certificate, the courts will most likely have to decide this matter. Taking the time necessary to conduct the name research up front will help avoid legal costs after the business is opened and operating.
Corporations, limited partnerships, and limited liability companies organized in other states or countries may transact business in other states as “foreign corporations or limited liability companies” by obtaining a certificate of authority through the appropriate Secretary of State. The Secretary of State can provide forms for the certificate of authority. An out-of-state business may also consider the option of creating a corporation, limited partnership, or limited liability company for transaction of business in the state in which it intends to operate.
A name may not be used by more than one corporation in the state. The Secretary of State will perform a name search to verify that no other corporation, limited partnership, or limited liability company is using the exact name selected. To find out if a business name is available, call the Secretary of State and they will do an immediate computer search. The search is only for business names registered with the Secretary of State, and does not include business names registered only a county clerk.
If a corporation will transact business under names other than that stated in the articles of incorporation, the corporation must file an Assumed Name Certificate with the Secretary of State, and with the county clerk in which the principal office and registered office of the corporation are located. (Speak with your CPA or attorney for details on Assumed Name Certificates.)
Disclaimer: The information contained here is not to be construed as legal advice. You need to consult an attorney and accountant to be sure of what is best for you and your business. Do not take this recommendation lightly it can have a severe impact on your business and your income. Get their advice. There are a lot of filings in many municipalities and States that can be done by you as a business person — still get professional advice!