- Entity Choice Generally
- General Business (Legal) Stuff
- Operating a Corporation/LLC
- Steps to Take When Forming an Entity
- Tax Considerations and Related FAQs
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.
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’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.
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.
S = “Small”, and, yes, that’s per the Internal Revenue Code.
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.