Which entity best suits you? Was your entity properly formed and more importantly has it been properly maintained? Improper formation or maintenance of your business entity can cause failure of your corporate veil. Did you know similar failures apply to a Limited Liability Company as well? Abel Law Group manages the entire entity formation and compliance process for you. From formation to preparing your bylaws, operating agreements, meeting minutes and more
A corporation is a separate legal entity created under the laws of the state in which the corporation is formed. Corporations consist of shareholders (owners), officers, and a board of directors. They are given many of the same legal rights as an individual. The shareholders of a corporation can also be officers and/or members of the board of directors. Conversely, shareholders do not have to be officers and/or members of the board of directors of the corporations they own — third-parties can be appointed. Shareholders vote and appoint a board of directors, who in turn appoint the officers. The board of directors is charged with making decisions that relate to the company’s business purpose and appoint the officers who run the day-to-day operations of the corporation.
Corporations also offer liability protection as Shareholders have limited liability in the sense that their liability is limited to their investment in the corporation making this type of entity a major draw for smaller businesses. Officers and members of the board of directors also have limited liability in the sense that they are not liable for the obligations of the corporation; except in the case of special circumstances, like gross negligence.
While many people will say they have an S-Corporation or C-Corporation, there really is no difference as the “S” and the “C” merely designate which section of the IRS code they elect to be taxed at. An S-Corporation disburses all of its profit to its shareholders, who in turn pay individual income tax, while a C-Corporation pays tax on an entity level, and its shareholders will pay additional Dividend tax should the company distributes its profit.
The Limited Liability Company (LLC) is probably the newest form of entity offering limited liability. Wyoming was the first state to enact a Limited Liability Companies Act and now every state has some version of a Limited Liability Companies Act. Limited Liability Companies offer virtually the same limited liability protections as corporations. As with the corporation and the limited partner of a limited partnership, the only asset at risk is the members’ investment in the Limited Liability Company.
State law governs the creation of Limited Liability Companies and they are separate entities from their owners. The owners of Limited Liability Companies are referred to as members. When organizing a Limited Liability Company, the owner can choose a to have the company managed by its members (member-managed) or through a Manager(s) (manager-managed).
A member-managed Limited Liability Company is a Limited Liability Company that is managed by its owners. Manager-managed limited liability companies can be managed by one or more of the members or even by a third-party. We strongly recommend forming Manager Managed LLCs due to their ease of operating and some recent negative court cases involving member managed ones.
The members and managers of a Limited Liability Company are not liable for the obligations of the Limited Liability Company. Managers of a manager-managed Limited Liability Company are much like the officers of a corporation. The members elect the managers and managers conduct the day-to-day operations of the Limited Liability Company. One could structure a Limited Liability Company to operate much like a limited partnership, but without the general partner (manager) having unlimited liability.
The sole proprietorship is probably the most common and least complicated business structure utilized in America today. While it does have a few advantages, they are far outweighed by the disadvantages in terms of asset protection. A sole proprietorship is simply one person engaging in a business that he or she owns and manages. The person is responsible for all business transactions as well as all debts and liabilities incurred by the business. The business can be sold or even passed down to the sole proprietors’ heirs. It requires no formal formation like a Corporation or a Limited Liability Company (LLC).
A general partnership is a business enterprise entered into for profit, which is owned by more than one person. A general partner may or may not choose to invest in the partnership; however, he or she will participate in running the partnership and is liable for all acts and debts of the partnership or any of its partners. Each partner shares in the profits and shares in the liability of the partnership, including losses. As with the sole proprietorship, the general partnership is not a separate legal entity and, therefore, any potential liability would be focused on the partners. The general partnership, like the sole proprietorship, offers no asset protection.
We disfavor general partnerships for the same reason we disfavor sole proprietorships — no asset protection!
A limited partnership allows for two classes of partners — limited partners and general partners. Limited Partnerships are controlled by the general partners who run the day to day operations of the limited partnership and are charged with conducting most of the partnership’s business. Limited partners on the other hand are simply investors and are not involved in the management of the Limited Partnership. The choice in this type of business agreement is to have control over an investment (general partner) and be subject to unlimited liability or to have limited liability, but no control. In fact, if the limited partner were to exercise some type of control, or be involved in the management of the limited partnership, his or her limited liability status could be compromised. The argument is that once a limited partner begins acting like a general partner he, potentially, can be treated as a general partner and be subjected to unlimited liability.
As stated above, the general partners of a limited partnership have unlimited liability unless we create them as a Limited Liability Partnership or Limited Liability Limited Partnership which could reduce the personal risk to the general partner. If the limited liability partnership were to be sued, all of the general partners’ assets would be at risk. The limited partners, on the other hand, only have liability up to the amount of their investment in the limited partnership..
Trusts are interesting because they are the only entities that do not have owners. A trust is what is referred to as a “Jural Person.” The best way to describe a “Jural Person” is a “person” that was created by law. Trusts consist of settlors, trustees, beneficiaries, and corpus (asset).
The settlor is the one who creates the trust by placing an asset in the trust, and the trustees administer the trust for the benefit of the beneficiaries. The settlor creates a trust by executing a declaration of trust. The declaration of trust states who will be the trustees and who will be the beneficiaries. Furthermore, the declaration of trust lays out how the assets are to be administered and distributed by the trustee for the benefit of the beneficiaries. Once the settlor has relinquished ownership to an asset placed in trust, that asset becomes the corpus of the trust.
It is the duty of the trustee to administer the trust as outlined in the declaration of trust for the benefit of the beneficiaries. Generally, the beneficiary has no right to the asset in the trust until it is distributed to him by the trustee.
One simple way to view a trust is that the title to the asset placed in trust is “split” into legal title and equitable title. The trustee holds legal title in that the trustee is charged with the administration of the asset. The equitable title rests with the beneficiary because he is to receive the benefit of the asset.
Trusts can be very complex and require a competent professional for proper drafting. Since there is no “standard” trust there is much flexibility when creating a trust.
Trusts are especially useful for owning limited partnership interests, Limited Liability Company memberships, and corporate shares. The advantage is that these securities can be placed in trust for the benefit of the owner’s children or other desired beneficiaries. The trust will be protected from potential litigation or liability involving assets owned by the limited partnership, Limited Liability Company or corporation because those entities have limited liability. Despite what you may have been told, owning your assets directly into your estate planning trust DOES NOT provide any asset protection. Unless your trust is irrevocable, it provides no liability protection.