- Entity Choice Generally
- Operating a Corporation/LLC
- Steps to Take When Forming an Entity
- General Business (Legal) Stuff
So glad I decided to hire you to register my business instead of trying to do it on my own. Thanks again!
Congratulations! You just asked the best question (which is why it’s also at the top of the FAQs). You know (or at least should know) your business best, and so that also means you know what liabilities you may face. Make a list. Call up your insurance broker (you have one, right?) and talk through what’s covered and then what isn’t. Are there things out of your control, such as employees? Those are some things to consider. You can read my post on this or watch the video on this topic. It’s very important that you not waste time and money on something you may not need.
An LLC, or limited liability company, is a type of entity that protects its owners (members) and managers from liability, unless they personally do bad things. Like a corporation, an LLC happens when its Articles of Organization are filed with the state authority. In California, this is generally an online form. Keep in mind, there are other filings, and then ongoing responsibilities of those managers and members to continue shielding them from liability. And if there’s more than one Member, having a written operating agreement is highly advised. There may also be tax advantages to filing as an LLC.
Short answer: yes, but now it depends on even more than it used to. And even though I advise in the tax area, determining what entity is best for your enterprise now depends on a wide variety of factors that are specific to your entire economic situation and not just the business.
Aaah, if life were only that easy. Actually, sometimes it is. One rule of thumb — is it a small business not providing professional services, with no plans for investors and modest gross receipts? That’s a case where you might lean heavily toward an LLC. Investors on the horizon? Corporation. The analysis can get tortured for businesses that are larger or are growing. Real estate tends toward LLCs.
An S Corporation is a corporation that has made an election (i.e., timely filed a form) to be taxed as a “pass-through”, i.e., the corporation itself is generally not taxed, but all of the taxes for profits and income, as well as for losses and expenses, are passed through to become the obligations of the individual shareholders. There are limitations to which corporations can elect S Corporation treatment. For example, S Corporations cannot be owned by more than 100 shareholders or by non-resident aliens. The “S” stands for . . . wait for it . . . small.
Nice. Figuring if you click here you’re home free. In a way, yes. To form one, you file Articles of Incorporation with the governing corporate authority in your state. In California, where my practice operates, that’s the Secretary of State. Articles should contain certain provisions that may or may not be obvious to you, and are not contained in most templates offered by the state or online corporate formation. Additionally, formation is the first of several steps to take to ensure that your corporation is protecting you.
You could. But you’d want a good reason to. For example, if you live there and are planning on running your business from there, makes sense. If you’re running your business in California, then incorporating in Nevada may be due to more nefarious reasons. Some attorneys like to organize their clients in Nevada because reaching an LLC’s assets through its members in Nevada is not permitted. Still, if your business is based in California, you’ll still need to register the corporation or LLC in California (too) and pay taxes in California.
You’ve read a lot about that, I’m sure. There can be reasons to form there. Here are two that come up a lot: First, your business is going to have big deal investors who like being in Delaware, sometimes for reason number . . . Second: Delaware law is corporate-centric, efficient, and can provide better protections for the corporation’s officers and directors. But like filing anywhere else, if the principal place of business is in another state, you’ll need to register your corporation (or LLC) in that state as well as filing a “foreign” corporation/LLC in Delaware.
If you’re not thinking about Delaware, then maybe. Sometimes you’re going to have to. If, for example, you’re forming an LLC for investment real estate, with a few exceptions, that state will require you to form your LLC in the state where the property is located. There may be other reasons to be in another state, but those come up rarely.
I wish the answer to this were more existential, and thus more interesting. Alas, it’s as simple as this: a corporation becomes a corporation when you duly file Articles of Incorporation, also know as charter documents, with the state official authorized to recognize and process such filings. In California, that’s the Secretary of State. In Delaware, it’s the Division of Corporations. Same for LLCs, except that formation document tends to be called Articles of Organization.
Corporations provide liability protection for its owners, as well as its officers and directors, with some exceptions. So, there’s that. Insurance covers some things, but not all. And sometimes a corporation won’t help you . . . for example, if you’re a lawyer and you commit malpractice. That’s on you, individually – corporation or not. Tax may also drive a reason to incorporate or organize as an LLC.
Some states use “Certificate of Incorporation” as an alternative to Articles of Incorporation; for example, New York and Delaware.
First things first: the question really is whether an entity is going to do you any good at all. From a liability perspective, keep in mind that anything you do is your personal problem; putting your medical practice into a corporation won’t shield you from your own malpractice. But it could, for example, shield you from your employee’s malpractice, or your file clerk’s sexual harassment claim against a fellow doctor. And it may also shield you from your partner’s malpractice. So there are upsides.
Some states, like California (where I practice), restrict the use of certain entities by professionals. The term “professional” itself has some grey area. Typically, professionals required to have a certain education, training, and experience aren’t permitted to use an LLC for their business (in California). So lawyers, doctors, etc. will generally use a corporation, though certain professions, like lawyers, etc., have other specific partnership entities available to them. Others, like real estate appraisers, are still permitted to use an LLC. There may also be tax reasons, as a professional, to put your business into an entity. There’s much to consider.
Should you? Probably not. Are you required to? Maybe. It depends on the type of profession you’re in. Lawyers, for example, are required to be in professional corporations (“PC”). Forming as a PC may require additional restrictions in your bylaws, for example concerning ownership. So if you don’t need to, generally you shouldn’t. But you may not have a choice.
This is the person who signs and causes the filing of the Articles of Incorporation (or, in the case of an LLC the Articles of Organization) with the designated state authority. In a small business, this is usually the owner/shareholder/member. Some folks have their attorney sign the documents to help expedite the process, and that’s ok (but not necessary).
Here’s the answer: It’s not uncommon for a person to want to protect themselves when in a group of people and use an entity to represent their investment. The individual(s) may have other personal duties, like being on an advisory board, or being an officer. Sometimes groups of people will form an entity to control what happens to their proceeds from an investment rather than giving the entire group optics into their sub-arrangement. So it can frequently be worth the extra overhead for the additional entity. So a typical structure is an LLC to hold the property, a manager or group of managers, and then the Members, who may all be individual, or may be groups of people in various entities.
No, but thanks for asking a weird question. You’re likely getting confused with some industries, like talent management, that may require you to obtain a license from a particular state agency. The formation of the entity doesn’t trigger automatic licensure, nor does it automatically require you to get a license for your business. Licensure for your business is separate and apart from forming an entity. And, in some instances, if you are required to obtain a license, that may dictate the kind of entity you form.
Sorry, but . . . LOL – no. People do try this, though. The purpose of an LLC, and therefore what it ultimately protects, by law, is to protect its owners (Members) from liability for claims made arising out of the operations of the business in the LLC. If a person obtains a judgment against you personally, it’s possible that person could eventually find their way to owning your LLC membership interest, and ultimately/possibly the assets in the LLC. It’s a long road, but anything can happen if the prize is big enough.
Any corporation can be an S Corporation, unless it doesn’t meet certain criteria. For example, an S Corporation cannot be owned by another corporation, with certain very narrow exceptions. And sometimes you don’t want your corporation to be an S Corporation, for example, when you are seeking VC investments.
S = “Small”, and, yes, that’s per the Internal Revenue Code.
Short question . . . long answer. For the most part, the classic answer, which is also correct, is a C Corporation (or an S Corporation) provides limited liability for its owners and management. Either one could provide additional tax benefits. On a less obvious level, having your business in a corporation may provide it with more “respect” in the business community, and may fend off nuisance suits.
Establishing a sole proprietorship isn’t complicated since there are no filings to establish a sole prop business. Lots of folks just open their doors and do business, and that’s it. There are other tasks that need to be performed, like getting a business license and (sometimes) filing/publishing a fictitious business name statement if you’re going to name the business. Some people will get a tax identification number to use instead of using their social security number. Usually business owners handle these pieces on their own since they’re all pretty simple.
California varies – sometimes it’s a matter of days, but sometimes, especially at the beginning of the year, it can take a couple weeks. You can always submit your documents on a rush (24 hours or even same day) basis. Other states? It really depends. Delaware’s quick.
It can, but not always. It’s not often the case that a business will put their business into an entity solely to save on taxes, although S Corporations for small businesses are frequently and legitimately used for that purpose.
Yes. But depending on what stage the business is at, they may not be immediately deductible as an operating expense, but may need to be treated as a start-up expense. This can get complicated; you should consult a tax advisor.