HE SAYS:

One of the first and, perhaps, most important business decisions you will make is the form in which you are going to operate your business.   This decision will affect all aspects of your business, including liability and tax related issues.

Sole Proprietorship is the most basic of business structures.   You conduct business in your own name or under an “Assumed Business Name” also known as a D.B.A.   Your D.B.A. is simply a trade or business name that you file with the County Clerk’s Office in the county in which you reside or conduct business.   As a sole proprietor, you assume full personal responsibility for all debts of the business and for all claims arising from its operation, including all taxes that become due.

A partnership is appropriate if your business is operated by two or more people or other entities under a formal agreement.   Each partner contributes money, property, labor or skills and each partner shares in the profits and losses of the business.   The Partnership must file an income tax return; however, the taxes are paid by the individual partners and not by the partnership.    Generally, all partners are liable for any actions taken by any of the partners in furtherance of the partnership.

A corporation is treated as a legal entity that is separate from its owners and which has its own legal rights and duties.   The owners of a corporation are the shareholders who exchange money or property, or both, for capital stock in the corporation.   Each year the shareholders elect a Board of Directors and Officers who run the day to day operation of the corporation.    The shareholders have limited personal liability for the debts and obligations of the corporation.   Unless you file as an “S Corporation”, the corporation is subject to a corporate tax on its profits before it is distributed to the shareholders who are also taxed on this distribution.

The law also recognizes, as a separate legal entity, Limited Liability Companies. The owners of the LLC are called members and the extent of their ownership interest is measured by the amount of their capital contribution to the LLC.   Unless otherwise stated in the Articles of Organization, profits and losses of the LLC are allocated, among the members, proportionately, on the basis of the value of each member’s monetary contribution to the LLC.

The above summary is based on the laws of New York State.   Anyone seeking to start a business is recommended to first obtain the advice of a knowledgeable attorney and accountant.

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This is the second part of a two-part series.  Read Limited Liability Company, Part 1 here.

HE SAYS:

Unless otherwise stated in the Articles of Organization, management of the LLC is vested in its managers as designated by the members; and the managers may, but need not, be members.  The managers of the LLC make decisions by voting at meetings, that must be held at least once a year, after notice or waiver of notice; and, unless otherwise stated in the Articles of Organization, a quorum is established when a majority of the managers are present.

Importantly, and similar to a corporation, the members and managers of a LLC are not liable for any debts, obligations or liabilities of the LLC or of each other, whether arising in tort, contract or otherwise, solely by reason of being a member or manager or participating in the conduct of the business of the LLC.  However, any judgment creditor of a member may seek payment of the debt from the member’s interest in the LLC.

A LLC is dissolved either as called for in the Articles of Organization or upon the consent of a majority of the members.  In the event of a dissolution, the assets of the LLC are first distributed to the creditors of the LLC and then to the members in proportion to their capital contribution to the LLC.

A LLC is of particular benefit to a single member in that, for Federal Income Tax purposes, a single member LLC is treated as if it did not exist.  This means that a Federal ID Number is not required, a Federal Income Tax return for the LLC is not required, and the income from the LLC is passed directly to the member’s individual tax return.

The summaries contained in Part I and Part II are based on the laws of New York State and anyone seeking to start a Limited Liability Company is recommended to first obtain the advice of a knowledgeable attorney and accountant.

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HE SAYS:

In addition to the usual legal forms under which businesses may operate, such as partnerships and corporations, the law also recognizes, as a separate legal entity, Limited Liability Companies.

A Limited Liability Company (LLC) is created when one or more people execute and file Articles of Organization with the Department of State.   The valid formation of a LLC also requires publication or notice in newspapers within the county in which the LLC maintains its office.

Similar to the powers of a corporation, a LLC is empowered, among other things, to sue or be sued; purchase, own, sell, assign and encumber real or personal property; borrow money and enter into contracts; maintain employees; and otherwise conduct its business.

The owners of the LLC are called members and the extent of their ownership interest is measured by the amount of their capital contribution to the LLC, much as a shareholder’s ownership in a corporation is measured by how many shares the shareholder purchased.

Unless otherwise stated in the Articles of Organization, profits and losses of the LLC are allocated, among the members, proportionately, on the basis of the value of each member’s monetary contribution to the LLC.

In the next installment we will discuss the management and related issues of an LLC.

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