Establishing a Legal Foundation for Business Success

by | Sep 4, 2011 | Featured

Presented by Randall Wood, Attorney and Leyah Valgardson, Marketing and PR, of Ascione & Associates, LLC to ELP Orem

The Legal Structure of Your Business

When it comes to choosing legal structure of your business here in Utah, there are five legal entities to choose from. They are: Sole Proprietorship, Partnership, C-Corp, S-Corp, and Limited Liability Company (LLC). We will briefly cover each of these entities and then focus on the LLC.

The Sole Proprietorship is:

  • One person
  • Allowing the owner to be taxed at regular rates for individuals on the profits
  • Very flexible, easy to make quick business changes
  • Leaving the owner personally liable for business outcomes including all his personal assets
  • Usually set up as a “Doing Business As…” (DBA) and the name of the business
  • Providing limited fringe benefits
  • Requiring the owner to pay self-employment tax
  • Good for the life of the owner

The Partnership is:

  • Two or more persons
  • Allowing the business income to be taxed at personal income rates under Subchapter K in the tax code.
  • Easy to work with since the income coming to the entity passes through to the partners
  • Making the General Partners personal liable for results of all business decisions. Limited Partners have limited liability as spelled out in the Limited Partnership Agreement.
  • Subjecting all profits from earned income to self-employment tax.
  • To continue for the life of all partners
  • In need of an Operating Agreement in case of a default or to define the exit strategy, etc.

The C-Corp:

  • Is very formal with resolutions, bylaws, minutes, and Articles of Incorporation, single class of stock.
  • Set up to raise a large amount of capital to fund operations
  • When going public, this entity is required along with stock certificates and a stock ledger.
  • Liability rests on the business entity, not the shareholders. Principles are shareholders.
  • Entity is taxed directly at corporate rates. Shareholders received dividends are taxed at individual rates. So there is double taxation of the income.
  • Shareholders can be 1-100 citizens or resident aliens of the USA
  • Fringe benefits are generally limited for owners
  • Can escape self-employment tax if reasonable salaries are paid
  • Has no limit to length of existence

The S-Corp:

  • Gives the protection of a corporation, but is taxed like a partnership
  • Has to much more formal documentation than a partnership. It’s similar to a Corporation with Articles of Incorporation, by-laws, minutes, stock certificates, and stock ledger.
  • Can be one or more people
  • Limits the liability of the owners
  • Income and losses flow through to the owners for taxation at individual rates. No corporate tax.
  • Has double taxation—taxed on earnings and again on dividends
  • Has no limit to the duration of the business

The LLC:

  • Runs like a partnership, but has the protections of a corporation
  • Is usually one or more persons, and persons does include “entities”
  • Requires Articles of Organization including bylaws and an operating agreement
  • Gives you, the owner, flexibility. If you want to pull the assests out or dissolve the LLC, you can.
  • Has limited liability. Owners are not personally on the hook if they are not grossly negligent.
  • Requires an annual report. It’s as simple as saying “We met this date, day. This is how the company is doing.” End of report. Of course the data must be in the report.
  • Normally is taxed like a partnership. However you can elect to be taxed under Subchapter S which is similar to an S-Corp, but is only taxed once on profits
  • Is usually limited to 99 years

Legal Steps to Start an LLC

  1. Select a business name
  2. Register your business as an LLC
  3. Create an Operating Agreement
    1. If there are 2 or more persons
    2. Needed for the Exit Strategy
    3. To protect each entity
    4. To spell out how profits are to be split up
  4. Create Contracts that will drive your business
  5. Create a Private Placement Memorandum (PPM) for the raising of money. If the raising of money is under a certain amount, there is no need for this instrument. This PPM lays out any risk, even absurd risk for:
    1. Getting investors
    2. Selling a security
    3. Original investments
    4. Attorney’s fees
    5. Planned and unexpected costs
    6. 12% interest on loans
    7. Triple damages

The PPM is very costly. $4,000 is the price for a very simple one.

Take-Aways:

When in doubt, work with an attorney. You’ll avoid legal pitfalls in the process.

Honor your organization as an LLC—don’t sign your name if you are an LLC.

Organize appropriately and… get an Accountant as quickly as you can afford one.

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Ascione & Associates specializes in helping Entrepreneurs and Small Business in legal matters. You can contact them through Leyah at leyahv@ana-law.com or call 801-854-1200. They are located in Provo at 4692 N 300 W Ste. 220, Provo, UT 84604