Business Formation

The operation of any business or enterprise is accompanied by many perils. Not only do businesses face the challenges of turning a profit, but also numerous legal liabilities confront business owners everyday. Whether these liabilities stem from contracts, tax, or tort (personal injury, negligence, etc.) the attorneys at the Knight & Franz Law Firm, PLLC, are here to assist you.

You have enough to worry about, so why not let us help you with some of the legal aspects of your business.

Formation

Choosing the right entity for your needs is the first step in lowering your liability. The right entity can protect your personal assets from lawsuits and it can also help to ensure your business runs smoothly. The choice of entity also has many tax implications. Our firm is more than willing to assist you in forming or changing your business structure. We also understand the financial strains many small businesses face and therefore offer flexible rates and payment options.

See the bottom of this page for a chart that shows the differences between the major business entities.

Sole Proprietorship

A sole proprietorship is an unincorporated business that has a single owner. Accordingly, a sole proprietorship does not require filing with the state to create it. The downside to the ease of creation and operation is that the owner is personally liable for all debts and obligations of the business. Further, all income from a sole proprietorship must be reported as income or loss on the owner's personal income tax.

Assumed Name-Doing Business As-DBA

An assumed name allows an individual or entity to use a name other than their own in business affairs. Although a DBA does not grant any particular protection, banks as well as others may require a DBA to open an account or do business in a name other than that of the owner. Creating a DBA is not a complicated matter, but it does require filing in the appropriate places.

General Partnership

Any business that has two or more owners and has not filed as another entity is by default a general partnership. The lack of any filing requirements makes the creation of a general partnership incredibly easy, since they are created by default. However, it is good practice for general partnerships to at least have a partnership agreement to cover the many seen and unforeseen aspects of the partnerships business.

All partners in a general partnership are liable for all the debts and obligations of the partnership. Furthermore, any partner can usually bind the partnership. Therefore, each partner is not only liable for their own actions, but for the actions of every partner. This makes partners in a general partnership especially prone to liability issues.

General partnerships are not taxed as entities, and all income is simply passed through to the partners to pay as personal income tax.

Limited Partnership-LP

A limited partnership differs from a general partnership because at least one person or entity is named as the general partner and at least one person or entity is named as a limited partner. The limited partners function similarly to shareholders or passive investors. Limited partners have little or no control over the partnership, but their liability is limited to their financial contribution to the entity. General partners, however, have control of the partnership and are open to liability.

Limited partnerships require filing with the State for creation. An informational tax return also must be submitted for the partnership, but the partners are taxed individually on their income.

Limited Liability Partnership-LLP

In a limited liability partnership, partners are not liable for the actions of the other partners to the same degree as a general partnership. Each partner is liable for their own actions. However, LLPs are required to maintain liability.

Furthermore, LLPs require filing with the State for creation. Limited Liability Partnerships are taxed the same as general partnerships (owner's are taxed individually on income). As with all partnerships, a partnership agreement should be created and signed by all the partners.

Limited Liability Company-LLC

A limited liability company has many of the same advantages of both a partnership and a corporation. LLCs may choose to be taxed as an entity, like a corporation, or to be taxed in the same manner as a partnership. An LLC can be run in much the same way as a partnership by being "member managed," or they can choose to be operated like a corporation by being "manager managed." Additionally, an LLC many be owned by one person, or several. When there is more than one owner, each member of an LLC is not personally liable for actions of other members.

An LLC must file with the State for creation, and also file an informational tax return. As discussed above they can be taxed similar to either a corporation or a partnership. Similar to the partnerships above, members of an LLC should draft and sign a company agreement.

Incorporation

Running a corporation can be a daunting task. They can require a great deal of paperwork and recording of corporate meetings, transactions, and shareholder voting. However, modern State laws have eased many of these requirements and now allow for greater flexibility in corporate management.

Corporations must file with the State for creation, and pay franchise taxes to maintain their entity status. This entity status shields shareholders from liabilities of the corporation.

Corporations are taxed as an entity on its income, and shareholders are also taxed on any distributions from the corporation. Many smaller corporations employ its shareholders and therefore eliminate this double taxation by not making distributions to shareholders.

Combinations and Other Variations

There are numerous combinations and variations of all the previously described business formations. These include Professional Limited Liability Companies, Closed or Family Corporations, and Limited Liability Limited Partnerships just to name a few.

Contact the attorneys at the Knight & Franz Law Firm, PLLC, and we will schedule an appointment to review your business needs and discuss the benefits and disadvantages of each entity type with you to determine your best option.

Making the Right Choice

With so many options, many individuals find the assistance a lawyer can provide to be of great benefit. Here at the Knight & Franz Law Firm, PLLC, we can patiently and thoroughly go over all your options, and for a reasonable rate prepare and file all the necessary paperwork to create the entity of your choice. We also offer assistance in writing your entity agreements. We are here to work with you, so that your business works for you.

The chart below summarizes the major differences between the various business entities:

Entity-	Some business forms cause the creation of a separate being, an artificial "person" that is different from the owners of the business.
Limited Liability	State law that limits the ability of a third party to sue owners of a business, this limitation is not absolute and does not protect from all lawsuits.
Taxed to Individual	Tax is not accessed against the business, but instead all tax must be paid by the individual owners.
Taxed to Entity	The business itself is taxed on the business income.
Run By All Owners	All owners have at least some control over business operations and decisions.
Not Run By All Owners	Ownership does not itself give a right to run the business, the trade off is those without control have more protection. In this situation, either only a few members have control, or control is vested in a manager or a board.
* Limited Liability Company	A Limited Liability Company allows the business owners choices at the time of business formation. For example, owners may choose to be taxed similar to a corporation, or similar to a partnership. The business will not be taxed both ways. Additionally, owners can choose how the business will operate, ie similar to a corporation or similar to a partnership.
* Corporation	A corporation is taxed differently from most other entities. Within a corporation "double taxation" exists. The corporate entity is taxed on its own earnings. Additionally, any dividends paid to shareholders are taxed to the shareholders.
If a Business Entity Does Not Provide Limited Liability Protection	An owner can be liable for dealings of the business simply because they are the owner, even if they have no direct involvement. This is called enterprise theory, the fact that the owner could make money allows others to sue the owner for transactions connected to the business.

The information you receive from this page is not, nor is it intended to be, legal advice. You should consult with an attorney regarding your specific legal matter.

We invite you to contact us and welcome your calls, letters, and electronic mail. Contacting us does not create an attorney-client relationship in itself. Please do not send us any confidential information until such time as an attorney-client relationship exists.

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