In the last article we looked at a few different types of business organizations, including sole proprietorships, general partnerships and limited partnerships. These types of business organizations are easily organized and a good option for some businesses, but there are other options available that you should know about.
Limited liability corporations, or LLCs, are similar to limited liability partnerships in that they offer some protection for the members’ personal assets. The LLC is made up of members rather than partners, and these members are protected by the LLC since the creditors of the LLC cannot usually reach the members’ personal assets for debts of the LLC. An LLC can be formed with one or more members and is created by delivering the articles of organization to the Secretary of State’s office. The article of organization are the formal filing that each state requires for recognition as an LLC and must include the name of the LLC, the address of the LLC and the name of an agent for the LLC. There are some special records which will need to be kept for the LLC, as each year the LLC must file certain reports with the state to maintain the limited liability status.
There are two types of management styles that can be used with an LLC. The more common management style is member-management. In this situation, all of the members of the LLC have the right to participate in management. The second option is manager-management, where only designated members have management authority as provided in the articles of organization. Profits and losses of the LLC are shared equally among the members, unless they have otherwise agreed. Taxation of the LLC is much like a partnership since the LLC can elect to be a “pass through entity,” which means that the LLC itself does not pay taxes on the money that comes in. Instead, income is taxed only after it is distributed to the members. The LLC also has the option of being taxed as a corporation.
Corporations offer liability protection for its shareholders, which are similar to members in an LLC. Shareholders of a corporation will not be liable for the obligations of the corporation. Forming a corporation requires that several legal documents be drafted. A corporation begins when the articles of incorporation are filed with the Secretary of State. The articles of incorporation must include the name of the corporation, the purpose of the corporation and the stock structure. You will then need to file a fictitious name statement if the name of the corporation will be different than your name. The next document you will need are the bylaws. The bylaws include most of the details of how the corporation will be ran – what officers you will have, when the shareholders meet, how many people serve on the board of directors.
Record keeping and other formalities are the most complicated with a corporation. There must be regular board meetings and annual shareholder meetings. Also there are annual filing requirements at the state level. Management is also more complicated. The shareholders elect the board of directors, who then appoint the officers. The officers are responsible for day-to-day management decisions. The board of directors is responsible for the long term planning and management. Shareholders have limited management authority and vote only on extraordinary measures, such as selling more than half of the assets or dissolving the corporation.
Shannon Mirus, of Farmington, Ark., is a licensed attorney in Arkansas, pursuing an advanced masters degree in ag law at the University of Arkansas.