Business Form: Corporation, Partnership, or LLC?

Josh Mostyn is licensed to practice law in Arkansas.

When starting a new business or restructuring an existing company, there are many factors to consider in choosing the proper form. For example, is bonding a typical requirement in the industry? Many bonding companies prefer an incorporated business. Who does the business serve? Is business conducted in an office setting, a retail storefront, or a manufacturing plant? Will the company have employees or independent contractors?

While filing the initial organizational documents may be simple enough (and in some cases not even required), the true “business form” (the type of business) should be carefully considered and  well documented. Who will be responsible for the daily management decisions of the company? Will there be more than one owner running the business, or does the ownership group prefer to designate a managing board? Is there a single owner? Will one person manage the company, while other owners simply use the business as an investment vehicle? The limited liability company (LLC) can be organized as “manager-managed” or “member-managed,” and members may share control or even vest greater authority in a single Managing Member.

Other business forms may prevent a single owner from creating excess liabilities for the company and/or other owners. What type of liability protections do owners demand with regard to commercial debts, personal injuries on company property, or professional malpractice? What are the owners’ major tax considerations? Corporate forms offer shareholders limited personal liability, while partnerships offer single-level (individual) income taxation. The LLC business form offers both.

When forming a business, most owners first consider how profits will be distributed. After all, a positive attitude is necessary for success. But just as important is how losses should be allocated. Depending on the type of company that is formed, owners may or may not have the obligation to provide future capital. Owners must also contemplate the company’s need for outside financing, as well as who will guarantee the debts if company assets are inadequate.

Attention should also be given to the level of formality decision-makers will need to exercise. Who will sign checks? Are spending limits necessary? Will the company hold board meetings, and if so, how often? Who will keep the minutes? Where will the records be stored? While this information may be useful, there may be liability concerns if formalities are required but not followed.

And a little up-front planning can prevent litigious disputes in the future. What will happen to the company if an owner dies? Are owners allowed to sell or transfer their interests? Will owners be indemnified by the company for expenses incurred in defense against legal actions arising from their management?

A proper operating agreement (or partnership agreement) will address these and other issues.  I recommend hiring a lawyer to assist you with business formation.

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