By William W. Matz JR., Northampton and Lehigh County business attorney.
Tax costs, liability exposure and the practical convenience of various forms of business are the points that most clients raise when they consider setting up a business organization. Different types of ventures require different organizational means: the sole proprietorship, the general and limited partnership, the limited partnership, and the corporate form are all possibilities. Even within the corporate structure, different kinds of operating procedures are possible. The following paragraphs offer summaries of various aspects of business organization.
a) Forming a Corporation
There are many definitions of what a corporation is. Some call it an “artificial entity,” enjoying certain legal functions, rights and duties. Being an artificial or fictitious person, it can only act through its directors, who are elected by the shareholders.
A corporation may be formed for a wide variety of purposes, both profit or non-profit. Ownership of corporate stock may be transferred freely by sale or by gift. The corporation has perpetual existence that remains unaffected by the death of any director, officer, or shareholder. The corporation, as a legal person, can sue and be sued, make contract, hold both real and personal property, and issue stock.
b) Forming Limited Liability Companies
When forming or reorganizing a company or venture, the choice of what form of organization to use has expanded in recent years to include limited liability companies (LLCs). An LLC has the advantages of a partnership’s flow-through tax treatment, a corporation’s limited liability, and an owner’s control of management.
An LLC resembles a partnership, but it is a legal entity distinct from its members. A business wishing to exist in the form of an LLC must meet the partnership requirements of the Internal Revenue Code, as well as file documents (e.g., Articles of Organization) with its respective state and meet the state’s requirements for organization.
The LLC form of organization may be more desirable than other business forms for various reasons, such as:
- Limited liability—members of LLCs are not liable for the organization’s debts, obligations, or liabilities; they are generally liable only to the extent of their capital contribution to the LLC.
- Tax purposes—LLCs are taxed as partnerships, rather than as corporations. This means, among other things, a single level of Federal income tax and much greater tax flexibility.
- Management flexibility—unlike S corporations, there are no limitations on the number and type of owners, and unlike limited partnerships, all members may manage the corporation without losing liability protection.
The choice of business organization is complex. The advantages and disadvantages are complicated. The various considerations include choice of the entity, liability, changing ownership, raising capital, making policy, credit management, flexibility, and tax implications. One should not proceed without legal advice and guidance.