PUTTING TOGETHER THE BUSINESS ENTITY
Is Your Business Protected?
If you start to undertake the task of forming a business you will find many challenges ahead but also many potential rewards as well. A new business venture can test your strengths and weaknesses but also encourage your creativity and entrepreneurship. A new business brings more than just the rewards of profit-making but also the rewards of independence, confidence, and personal satisfaction.
In North Carolina there are some distinct protection advantages to being either a corporation, limited liability company, or limited liability partnership. The advantages is that these entities provide to the owners, officers, members, directors, managers, and other representatives limited liability protection. This means that the business entity will stand in the shoes of the representative agent or officer and will indemnify them in the event of any legal action, claim, or cost. The limitation of liability means that, in general, the only risk that an owner bears in the investment that he or she has placed into the business entity. Hence, the business entity shields the owner from having claims filed against their own personal assets.
Once a business entity is established it is important to follow the North Carolina Corporate Formality Test. Often we find when reviewing corporate records of businesses that they have failed to adequately meet the Corporate Formality Test. This test requires the business entity to perform and act as a corporation or business. In general, a business is acting as a corporation when it has regular meetings and minutes, when the bank account is separate and apart from other personal accounts, when it has sufficient capitalization to meet its obligations, distributes dividends or profits to its owners, when the officers and managers sign on behalf of their entity and not personally, and the business transaction are treated at an arm's length transaction. Good planning and review in this case should consider the benefits of becoming a limited liability entity and reviewing such entity's records and performance to ensure it attains the benefits of its limited liability status pursuant to North Carolina's
Forming the Right Business Entity.
Essentially in North Carolina, there are five (5) forms of business entities. These five (5) forms are:
1. Sole Proprietorship
4. Limited Liability Company
5. Limited Partnership
For most of our business owners we recommend that one primary issue with concern is protecting the company and the owner from liability. Limited Liability exists only in corporations, limited liability companies, and limited partnerships. Determining which form of limited liability entity to use often depends on the nature of the business and on the tax advantages each business entity will provide.
The Corporation is broken into three (3) main types of entities. These entities are as follows:
1. A Non-profit Corporation which has no Shareholders.
2. A C-Corporation which is an entity that pays and files its own taxes.
3. An S-Corporation which receives favorable tax treatment and does not pay taxes - the transfer of such income made in a Corporation to the individual owners.
The S-Corporation is perhaps one of the most popular business entities that we form. The S-Corporation may have one hundred (100) shareholders but it may only be owned by individuals. The advantages of the S-Corporation are as follows;
1. Limited liability in that the individual owners are only liable up to the amount of their investment.
2. The S-Corporation does not pay tax.
3. The individual owners may declare dividends instead of receiving all of their monies as profit as income hence bypassing the social security tax of 15.3% on any dividend distributions.
4. The S-Corporation is easy to form.
5. The S-Corporation provides a means for passing ownership in a business to your family.
To form an S-Corporation, the following documents are prepared by our firm:
1. The Articles of Incorporation are filed with the Secretary of State. The Secretary of State's filing fee is $125.00. The Articles of Incorporation list the principal name of the business and secure that name throughout the State, the registered agent for which any claims would be filed, the principal address of the business, the amount of shares that are authorized to be distributed to shareholders, and a clause indemnifying the shareholders and officers from any liability.
2. The Bylaws of the S-Corporation will set forth the rules and regulations of the Shareholders, Directors, and Officers and establish how voting is determined and when meetings will occur.
3. The Minutes of the Incorporator and the Minutes of the Directors will establish the Shareholders, Directors, and Officers and will approve any contracts of the Corporation and authorize the Officers and Directors to act on behalf of the Corporation.
4. The Application for Employer Identification Number (SS-4 Form) is used to establish any bank accounts and to properly identify the Corporation as a business entity.
5. The Election By A Small Business Corporation (Form 2553 - Sub-S Election) which establishes the Corporation's tax favorable treatment with the Internal Revenue Service.
6. Stock Certificates which must be issued to establish ownership by the owners in the Corporation.
7. Shareholders' Agreement if more than one shareholder owns in the company which will establish the voting rights of shareholders, the value of shareholder stock, how stock can be distributed especially upon such events as death, disability, termination, retirement, or divorce. The Shareholders' Agreement will also allow the owners to determine every year the value of the corporation and in the event they fail to do so the Shareholders' Agreement will set forth a formula as to how the value will be determined or will appoint the company's accountant to make such determination independently.
LIMITED LIABILITY COMPANY
The limited liability company provides the following benefits:
1. Limited liability to the owners up to the extent of their investment;
2. Flow through tax treatment such that the entity will not pay tax if desired;
3. Serves as a means to hold investment real estate and when such property is sold no additional corporate tax is assessed against such property.
The limited liability company is also unique in the sense that it can be taxed in several different ways. The limited liability company may be taxed as a (1) sole proprietorship or shadow entity; (2) partnership; or (3) C-Corporation. In addition, the limited liability company may be owned by individuals, Trusts, or other companies. This flexible entity is also a popular choice since it can fit into many different situations.
The limited liability company and the limited family partnership can also be a great means for transferring business ownership to family. Any property held by the limited liability company or limited family partnership can be discounted for lack of marketability for reasons that the ownership in the business will be held only by family members. In addition, ownership interest in the limited liability company and the limited family partnership can be gifted to family over time thus reducing the amount of ownership interest or property held by the taxpayer, thus reducing the estate tax liability. The heirs receiving such gifts of interest, however, receive no control or vote or have the right to receive any benefit of property in the limited liability company until the taxpayer transfers management decision making and voting control to them. This serves as a tremendous tool to retain control over property yet transfer away the value to reduce estate taxes.
Our firm is actively involved in supporting charities, churches, non-profit organizations, and ministry groups. In fact, we actively support many ministries in North Carolina and serve as counsel for their board and to assist them in any way that we can.
To obtain tax-exempt status, a ministry or non-profit organization (other than a church which is automatically tax-exempt) must file a Form 1023 for seeking recognition as a tax-exempt entity. We actively assist businesses in working with them and working with the Internal Revenue Service for purposes of helping obtain the tax-exempt status. Once tax-exemption is obtained then an entity may solicit donations and such donor may be able to declare on their taxes that such donation is tax deductible.