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Incorporation

What is a Business Entity?

Business entities are all around us. Virtually all products you see at a store were produced or manufactured by a business entity. The Coca-Cola Company, Microsoft

Corporation, and For The People are just a few examples of business entities. In somewhat technical terms, a business entity generally refers to an organization that is operated for a profitable or charitable purpose. A business entity has an existence separate and distinct from its owners. It is a separate person in the eyes of the law. The most common types of business entities include C corporations, S corporations, LLC’s -- limited liability companies, general partnerships, limited partnerships and non-profit (or not for profit) corporations.

There are many other types of business entities, but they are not as common as those listed. A sole proprietorship is the traditional unincorporated one-person business. For legal and tax purposes, the business is the owner. It has no existence outside the owner and is generally not classified as a business entity.

What are Some Benefits of a Separate Business Entity?

Personal Liability Protection for the Owners

One of the main benefits of forming a separate business entity for your business is that, other than for general partnerships, the owners generally enjoy personal liability protection. In most instances, the owners of a business entity are not personally liable for the debts and obligations of the business, unless they have signed a personal guarantee or act illegally, unethically, or irresponsibly.

An owner’s liability is normally limited to the amount of money which the owner invested in the business. Usually, only the business entity itself can be held liable for the debts and obligations of the business.

This personal liability protection is available to owners of C corporations, S corporations, limited liability companies and limited partnerships. The personal liability protection is not available to owners of a sole proprietorship or a general partnership.

Favorable Tax Treatment

Another benefit of having a separate business entity is that your business may receive favorable tax treatment. Most business entities are subject to taxation and must file a tax return. Some business entities are exempt from federal income tax and the profits or losses of the business flow through to the owners. These include S corporations, partnerships and many limited liability companies. Business entities may be subject to state income tax, depending on the laws of the states where they conduct business.

Business entities are generally entitled to take more deductions for business expenses than a sole proprietorship is permitted to take, such as the deduction of health insurance premiums paid on behalf of an owner-employee and other expenses such as life insurance. The taxation of your business entity will depend on the type of business entity you form.

Establishing Credibility

Another benefit of having a separate business entity is that it may help a new business establish credibility with potential customers, employees, vendors, and partners.

What Type of Business Entities Can For The People Help Me Form?

For The People currently offers the following products to assist you in forming the most common types of business entities:

  • C corporation
  • S Corporation
  • Non-Profit Corporation
  • General Partnership (GP)
  • Limited Partnership (LP)
  • Limited Liability Company (LLC)

Which Business Entity is Right for My Business?

You have already seen that you have a number of possible options for creating a business entity, and the choice of business entity ultimately comes down to a question of your individual needs.

You should consider the advantages and disadvantages of each type of business entity and determine which type better fits your business. For example, the choice of business entity affects whether the owners of the business will have personal liability protection from a lawsuit against the business. The type of business entity also affects how the business is managed and how the business pays taxes.

Some questions to consider when determining which business entity is right for your business include:

  • Do I want to protect my personal assets from claims by those who I do business with?
  • Will I manage this company alone or with other people?
  • Will I have large amounts of expenses that may be tax deductible? • Will I have investors?
  • Do I have a goal of becoming a large company?
  • Will my primary business involve offering professional services?
  • Will my primary purpose be charitable work?
  • Does my tax advisor or accountant have a preference for the type of entity I wish to form?

Will My Business Entity Need an Agent for Service of Process?

Yes, your business will need an agent for service of process in the state in which it is formed and in any other state in which it is authorized to do business. The agent for service of process is the person or entity authorized to receive legal papers on behalf of the business entity, such as when the business entity is “served” with a lawsuit. The agent is also referred to as the registered agent, local agent, resident agent or initial agent.

Generally, the agent may either be an adult individual who resides in the state, or the agent may be another business entity authorized to do business in the state. Many states allow an officer or director of the business to serve as the agent.

What if My Business Provides Professional Services?

If you have a license to practice law, accounting, medicine, architecture, or another professional service, you may qualify to form a Professional Corporation, Professional Limited Liability Company (PLLC), Limited Liability Partnership (LLP), or other professional business entity. These business structures can help licensed professionals protect their personal assets from lawsuits brought against their practice or against their partners, but generally do not protect the licensed professional from professional malpractice claims.

If your business is required to be licensed, registered or certified, it is recommended that you contact the appropriate licensing authority before forming your business entity in order to determine whether your services are considered professional and if there may be any restrictions.

In Which State Should I Form My Business Entity?

Due to their unique business laws and favorable tax policies, certain states are well known as favorable homes for businesses. If you will be doing business in multiple states, you may want to consider forming your business in Nevada or Delaware.

Your Home State's Advantages

Many people choose to form their business in the state where the business is located. Forming the business in your home state has several advantages:

  • Typically the least complicated, especially if you plan to operate in your home state.
  • Avoid paying franchise taxes and filing annual reports in more than one state.*
  • Be your own registered agent.
  • Usually costs less to form your business locally.

Delaware Advantages

Here are some of the reasons why many people choose to form their business in Delaware:

  • Names and addresses of initial directors need not be listed in public records.
  • The cost to form a Delaware corporation is among the lowest in the nation.
  • Delaware maintains a separate court system for business, called the “Court of Chancery.” If legal matters arise involving a trial in Delaware, there is an established record of business decisions.
  • No minimum capital is required to organize the corporation and there is no need to have a bank account in Delaware.
  • Just one person can hold all of the offices of the corporation.
  • No Delaware corporate income tax on Delaware corporations that do not operate within the state. However your income will be taxed in the state where you have your office(s), where your employees reside and perhaps where you solicit business.*
  • Non-resident owners are not subject to Delaware personal income tax.*

Nevada Advantages

Here are some of the reasons why many people choose to form their business in Nevada:

  • No Nevada corporate income tax on profits. However your income will be taxed in the state where you have your office(s), where your employees reside and perhaps where you solicit business.*
  • No Nevada annual franchise tax.
  • Owner information is not public record, which permits complete anonymity.
  • Just one person can hold all of the offices of the corporation.

*Income, sales and use tax issues vary significantly from state to state and can have a significant impact on where to form your entity and whether the entity should be formed in a state other than your home state. Seek your tax professional’s advice.

Does For The People Offer Other Business Related Services?

Yes, For The People offers a wide variety of business related services to assist business owners.

 Starting Your Company
  • Incorporation
  • LLC
  • Non-Profit Corporation
  • Name Reservation
  Maintaining Your Company
  • Resolutions & Bylaws
  • Annual Minutes & Reports
  • Operating Agreements
  • Corporate Kits
  Protecting Your Company
  • Trademark/Service mark
  • Copyright
  • Shareholder Agreement
  • Partnership Agreement
  Dissolving Your Company
  • Dissolution
  • Cancellation

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