The Early Years of a Business, Part 1: Selecting a Business Entity

The foundational step in protecting your personal assets from your business risks is by forming a business entity.  Here are several forms of popular business entities that you can choose from:

Corporation

  • Articles of Incorporation are required to be filed with the Secretary of State in order to form the entity.
  • A corporation is a legal entity separate from its owners, who own shares of stock in the company. They are called the shareholders.
  • Corporations can be created for profit or nonprofit purposes.
  • A special structure called a Professional Corporation may be used when the corporation provides a certain professional service (i.e. law).
  • Profits are taxed both at the corporate level and again when distributed to shareholders. This is referred to as “double taxation.”
  • Shareholders are not personally liable for corporate obligations unless corporate formalities have not been observed; such formalities provide evidence that the corporation is a separate legal entity from its shareholders. Failure to do so may open the shareholders to liability of the corporation’s debts. Corporate formalities include: issuing stock certificates, holding annual meetings, recording the minutes of the meetings, and electing directors or ratifying the status of existing directors.
  • The shareholder’s interested are managed by an elected group, the Board of Directors. The Board of Directors is responsible for election of the officers that run the day-to-day business of the corporation.
  • The shareholders and/or Board of Directors may adopt Bylaws setting for the management and the affairs of the corporation.
  • Shareholders may adopt a Shareholder Agreement which sets the rules for how the shareholders interact.

Subchapter S Corporations

  • Identical to the Corporation, except a tax election is made that enables the shareholder(s) to treat the profits as distributions and have them pass through to their personal tax return. This avoids “double taxation.”
  • A shareholder that works for the corporation must pay him/herself reasonable wages.

Limited Liability Company (LLC)

  • Articles of Organization are required to be filed with the Secretary of State in order to form the entity.
  • The LLC is generally considered advantageous for small businesses because it combines the limited personal liability feature of a corporation with the tax advantages of a partnership and sole proprietorship.
  • Profits and losses can be passed through the company to its members or the LLC can elect to be taxed like a corporation.
  • LLCs do not have stock and are not required to observe corporate formalities.
  • Owners are called members, and the LLC is managed by these members or by appointed managers.

Series LLC

  • Illinois is one of the few states that recognize the Series LLC.
  • Identical to LLC, except that the debts, liabilities and obligations incurred, contracted for or otherwise existing with respect to a particular series shall be enforceable against the assets of such series only, and not against the assets of the limited liability company generally or any other series of the LLC.

If you aren’t sure which entity is right for you, reach out to a small business attorney’s office, like Sparks Law Office, P.C., to get your business rolling in the right direction.

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