Business Management
Our Law Office can help you with every aspect and nuance of your business from "cradle" to "grave". The purpose and nature of your business will determine the form of business organization you will operate. It is important to consult an attorney to advise you on issues such as personal liability, expense of creating and maintaining a business organization, control of business entity, articles of incorporation or organization, operating agreements, buy-sell agreements, etc.
There are different forms of business organizations. Here are a few of the common ones people consider before forming a business entity:
Sole-Proprietorship:
This is the simplest form of business organization because it can be organized informally and is easily transferable. As a sole proprietor, you will encounter few problems with management, organization, and control of your business. You do not require a separate tax return because your business expenses, profits, and losses can be reported on Schedule C attached to your individual or joint tax return form 1040.
Moreover, a sole proprietorship is subject to a minimum of government regulations and organizing expenses. Perhaps the only formal document required is the filing of a trade name certificate but this is optional.
In a large or complicated business enterprise, the sole proprietorship may be impractical and too risky. You as the owner are subject to unlimited personal liability for all risks and obligations of the business. Your business may also be subject to termination upon death or if you are incapacitated.
Partnerships and Joint Venture:
There are 2 types of partnership to consider: General Partnership and Limited Partnership.
General Partnership:
Although no written agreement is required to form a general partnership, it is strongly recommended that you contact an attorney to create a written agreement regarding your general partnership. This will reduce the possibility of disputes about issues like control, financial interests, term of partnership, allocation of profit and loss, etc. A partnership is simply an association of 2 or more persons carrying on as co-owners of a business for profit.
Partners in a general partnership are personally liable for the debts and obligations of the partnership. A general partnership can avoid this by registering as a Limited Liability Partnership and filing the State of Maryland, Department of Assessments & Taxation (SDAT), a certificate of limited liability partnership.
Should you decide to use this form of partnership, consult with an attorney and a tax professional about the tax implications involved.
Limited Partnership:
A limited partnership is for investors who choose to make an investment in the ownership of a business without assuming full partnership responsibilities and liabilities. 2 or more persons form a partnership that has one or more general partners and one or more limited partners.
As with the Limited Liability Partnership, a certificate of limited partnership must be filed with SDAT. Failure to file this certificate may result in a limited partnership becoming a general partnership. Both the Limited Liability Partnership and the Limited Partnership must satisfy current statutory requirements to achieve legal existence.
Joint Venture:
A joint venture is a type of hybrid general partnership. It is formed when 2 or more persons intend to carry out a single transaction or a specified series of transactions for profit. The purpose of the joint venture is narrow whereas the purpose of the general partnership may be broad or narrow. We recommend that you consult an attorney to draft a joint venture agreement that will specify the purpose and scope of your business entity.
Limited Liability Company:
A Limited Liability Company (LLC) is unique because it is treated like a corporation for limited liability purposes but for federal tax purposes, it is treated as either a disregarded entity (if it has only one member) or as a partnership if it has more than one member (unless it elects to be treated as an association taxable as a corporation). This ensures that its members are not taxed twice (pass-through taxation) while preserving limiting their liability for the debts and obligations of the LLC. An LLC can also elect to be treated as an S-Corporation for tax purposes.
To achieve legal existence, an LLC must file articles of organization with SDAT. It is recommended that you contact an attorney to create an operating agreement that will govern such issues as control, profit sharing, assignment of interests, etc. An operating agreement could protect your interests in the event of a lawsuit because the ground rules for how the LLC is operated, resolution of disputes, and other pertinent issues are spelled out in an operating agreement.
We recommend that a single-member LLC should also have an operating agreement. An operating agreement combined with keeping diligent records helps a single-member LLC maintain a separate status from its owner for liability and tax purposes. Without an operating agreement, an owner of a single-member LLC will find it more difficult to show that the business is separate from them. Moreover, without an operating agreement, it may be easier for a court of law to "pierce the corporate (limited liability) veil" and attach the owner's personal assets in a dispute.
C Corporation:
A C Corporation is an independent legal entity. It can buy, own, or sell property, sued and be sued in its own name, etc. Personal liability of investors is limited. The Corporation is liable for debts and liabilities incurred by it, not the stockholders.
However, faulty incorporation, fraud, and not attending to formalities (such as conducting annual meetings, keeping minute books, signing contracts and checks properly, etc.) may result in claimants "piercing the corporate veil" and holding stockholders liable.
Tax-privileged fringe benefits such as group life insurance, pension plans, and medical insurance may accrue to corporate employees, tax-free and may be deductible corporate expenses. A Corporation survives the death or disability of a stockholder and a buy-sell agreement properly funded by life and disability insurance can provide a disabled stockholder or the estate of a deceased stockholder the opportunity to sell stock at a fair price.
Unlike an LLC, a C Corporation is subject to double taxation because the corporation is taxed on its net income and stockholders are also taxed on any dividends they receive from the corporation. Perhaps this is the reason why some individuals prefer an S Corporation to a C Corporation in order to avoid double taxation. Consult an attorney if you wish to form this type of business entity.
S Corporation:
An S corporation avoids double taxation because its profits and losses pass directly to the stockholders in the same manner as profits and losses pass to partners in a partnership. S corporations receive the liability protection of a corporation and tax treatment similar to a partnership. This means that claimants can only attach judgment against the contribution of the stockholders and not their personal assets unless the "corporate veil is pierced."
Stockholders of this corporation can participate in the management of business. A corporation may elect to be treated as an S corporation by filing form 2553 with the IRS. Be aware that there are restrictions as to who may form an S corporation. You need to consult an attorney about the advantages and disadvantages of an S Corporation.
Nonprofit Organization:
This type of organization is formed for a not-for-profit or social purpose. It is tax exempt from federal and state taxation due to its nonprofit status. An application for tax exempt status must be made on IRS forms 1023 or 1024 at the state in which the corporation is to be formed. As with corporations, the personal liabilities of the organizers are limited to their capital contributions to the organization and claimants can only attach judgment against the contribution of the stockholders and not their personal assets unless the "corporate veil is pierced."
Be aware that there are corporate formalities and rules that must be observed by the organizers in order to maintain the nonprofit and tax exempt status of the organization e.g. conducting annual meetings, keeping minute books, etc. We can advise you on the correct form of business entity based on your intentions and objectives. Contact us or call 301.356.5773 today.
There are different forms of business organizations. Here are a few of the common ones people consider before forming a business entity:
Sole-Proprietorship:
This is the simplest form of business organization because it can be organized informally and is easily transferable. As a sole proprietor, you will encounter few problems with management, organization, and control of your business. You do not require a separate tax return because your business expenses, profits, and losses can be reported on Schedule C attached to your individual or joint tax return form 1040.
Moreover, a sole proprietorship is subject to a minimum of government regulations and organizing expenses. Perhaps the only formal document required is the filing of a trade name certificate but this is optional.
In a large or complicated business enterprise, the sole proprietorship may be impractical and too risky. You as the owner are subject to unlimited personal liability for all risks and obligations of the business. Your business may also be subject to termination upon death or if you are incapacitated.
Partnerships and Joint Venture:
There are 2 types of partnership to consider: General Partnership and Limited Partnership.
General Partnership:
Although no written agreement is required to form a general partnership, it is strongly recommended that you contact an attorney to create a written agreement regarding your general partnership. This will reduce the possibility of disputes about issues like control, financial interests, term of partnership, allocation of profit and loss, etc. A partnership is simply an association of 2 or more persons carrying on as co-owners of a business for profit.
Partners in a general partnership are personally liable for the debts and obligations of the partnership. A general partnership can avoid this by registering as a Limited Liability Partnership and filing the State of Maryland, Department of Assessments & Taxation (SDAT), a certificate of limited liability partnership.
Should you decide to use this form of partnership, consult with an attorney and a tax professional about the tax implications involved.
Limited Partnership:
A limited partnership is for investors who choose to make an investment in the ownership of a business without assuming full partnership responsibilities and liabilities. 2 or more persons form a partnership that has one or more general partners and one or more limited partners.
As with the Limited Liability Partnership, a certificate of limited partnership must be filed with SDAT. Failure to file this certificate may result in a limited partnership becoming a general partnership. Both the Limited Liability Partnership and the Limited Partnership must satisfy current statutory requirements to achieve legal existence.
Joint Venture:
A joint venture is a type of hybrid general partnership. It is formed when 2 or more persons intend to carry out a single transaction or a specified series of transactions for profit. The purpose of the joint venture is narrow whereas the purpose of the general partnership may be broad or narrow. We recommend that you consult an attorney to draft a joint venture agreement that will specify the purpose and scope of your business entity.
Limited Liability Company:
A Limited Liability Company (LLC) is unique because it is treated like a corporation for limited liability purposes but for federal tax purposes, it is treated as either a disregarded entity (if it has only one member) or as a partnership if it has more than one member (unless it elects to be treated as an association taxable as a corporation). This ensures that its members are not taxed twice (pass-through taxation) while preserving limiting their liability for the debts and obligations of the LLC. An LLC can also elect to be treated as an S-Corporation for tax purposes.
To achieve legal existence, an LLC must file articles of organization with SDAT. It is recommended that you contact an attorney to create an operating agreement that will govern such issues as control, profit sharing, assignment of interests, etc. An operating agreement could protect your interests in the event of a lawsuit because the ground rules for how the LLC is operated, resolution of disputes, and other pertinent issues are spelled out in an operating agreement.
We recommend that a single-member LLC should also have an operating agreement. An operating agreement combined with keeping diligent records helps a single-member LLC maintain a separate status from its owner for liability and tax purposes. Without an operating agreement, an owner of a single-member LLC will find it more difficult to show that the business is separate from them. Moreover, without an operating agreement, it may be easier for a court of law to "pierce the corporate (limited liability) veil" and attach the owner's personal assets in a dispute.
C Corporation:
A C Corporation is an independent legal entity. It can buy, own, or sell property, sued and be sued in its own name, etc. Personal liability of investors is limited. The Corporation is liable for debts and liabilities incurred by it, not the stockholders.
However, faulty incorporation, fraud, and not attending to formalities (such as conducting annual meetings, keeping minute books, signing contracts and checks properly, etc.) may result in claimants "piercing the corporate veil" and holding stockholders liable.
Tax-privileged fringe benefits such as group life insurance, pension plans, and medical insurance may accrue to corporate employees, tax-free and may be deductible corporate expenses. A Corporation survives the death or disability of a stockholder and a buy-sell agreement properly funded by life and disability insurance can provide a disabled stockholder or the estate of a deceased stockholder the opportunity to sell stock at a fair price.
Unlike an LLC, a C Corporation is subject to double taxation because the corporation is taxed on its net income and stockholders are also taxed on any dividends they receive from the corporation. Perhaps this is the reason why some individuals prefer an S Corporation to a C Corporation in order to avoid double taxation. Consult an attorney if you wish to form this type of business entity.
S Corporation:
An S corporation avoids double taxation because its profits and losses pass directly to the stockholders in the same manner as profits and losses pass to partners in a partnership. S corporations receive the liability protection of a corporation and tax treatment similar to a partnership. This means that claimants can only attach judgment against the contribution of the stockholders and not their personal assets unless the "corporate veil is pierced."
Stockholders of this corporation can participate in the management of business. A corporation may elect to be treated as an S corporation by filing form 2553 with the IRS. Be aware that there are restrictions as to who may form an S corporation. You need to consult an attorney about the advantages and disadvantages of an S Corporation.
Nonprofit Organization:
This type of organization is formed for a not-for-profit or social purpose. It is tax exempt from federal and state taxation due to its nonprofit status. An application for tax exempt status must be made on IRS forms 1023 or 1024 at the state in which the corporation is to be formed. As with corporations, the personal liabilities of the organizers are limited to their capital contributions to the organization and claimants can only attach judgment against the contribution of the stockholders and not their personal assets unless the "corporate veil is pierced."
Be aware that there are corporate formalities and rules that must be observed by the organizers in order to maintain the nonprofit and tax exempt status of the organization e.g. conducting annual meetings, keeping minute books, etc. We can advise you on the correct form of business entity based on your intentions and objectives. Contact us or call 301.356.5773 today.