What Type of Business is Right For You?
Deciding what form of legal entity your business will take is an important decision. This will have an impact on the future of your business including your protection under the law, and the rules and regulations (for example: federal and state taxes) that will apply to you.
It is recommended that before you enter into any of these four forms of business, that you contact an attorney, CPA or other qualified individuals. Speaking with someone informed about the legal entities of business will reduce the risk of mistakes in the business setup. You can probably do the necessary paperwork and procedures yourself, but it makes sense to leave it up to the professionals. Also, contact the Small Business Development Administration for more information.
Four Basic Forms That a New Business Can Take
- Sole proprietorship
- Partnership (General or Limited)
- Corporation (C or S)
- Limited Liability Company
A sole proprietorship is usually owned and operated by one person. Under the law, it is not actually considered a legal entity. It is instead considered an extension of the person who owns the business. This individual has sole ownership of assets, but is also solely liable for the debts of the business.
A partnership can be formed in two ways. A general partnership is comprised of two or more individuals who join to start a business. Each person has proportional ownership of the business assets and proportional liability for business debts. Each person also has authority in running this business. A partnership agreement can be drawn up to alter each person's particular liability. However, despite this document, creditors may collect from each and every member of the partnership (this may include personal assets).
A limited partnership is made up of one or more general partners as well as one or more limited partners. Limited partners contribute capital and share in profits/losses. These limited partners, however, take no part in the running of the business and are not held liable for the organization's debts.
Whether taking part in a general or limited partnership, it is advisable that you draw up a partnership agreement. This document will detail each partner's rights and responsibilities. Partnerships are required to file both federal and state income tax. While the partnership is not typically taxed, each partner reflects charges for the partnership on his/her personal tax returns.
A corporation is an entity, which is created by filing Articles of Incorporation with the Corporations Division of the Georgia Secretary of State's office. A corporation must file federal, state and local taxes on its operations. One advantage to a corporation is the protection from liability afforded to shareholders. However, when an organization is small, creditors may require personal guarantees of primary owners. Another advantage to the corporation is the ease of raising capital through the sale of common or preferred stock. A disadvantage of the corporation is that the organization's income will essentially be taxed twice (once for the business and again on the shareholders personal income tax after collecting dividends).
There are two tax types of corporations: C and S. The "C" or "S" status refers to federal tax laws that are applicable to that particular corporation. Generally speaking, C corporations have their own tax identification numbers and pay their own taxes while S corporations are the opposite and are not taxed as if they are a corporation at all. Instead, it is taxed similarly to a partnership. Its gains and losses are reflected on the personal income tax of the shareholder. The S corporation does not provide protection from liability to its shareholders.
The distinctions between C and S corporations can be complicated. Questions about the meaning of these designations and the differences in the two types of corporations should be addressed to the Internal Revenue Service, http://www.irs.ustreas.gov, or to an accountant or attorney.
The limited liability company (LLC) is one owned by two or more persons known as members. It is a mixture of other forms of organizations. This form combines some of the partnership, corporation and S corporation's best features. Like a corporation, LLC's are created by filing Articles of Organization with the Corporations Division of the Georgia Secretary of State's office. You and your fellow members should write an operation agreement to control the conduct of the business.
An LLC shields the personal assets of members as if they were shareholders in a corporation. It also eliminates double taxation. Because an LLC is a somewhat new organizational form, it is unclear how the partnership tax rules will apply. You may not be able to conduct interstate trade as an LLC. Many state and foreign governments have not yet approved this form. In addition, an LLC may not have a perpetual life. While this form of organization is gaining popularity, you must take great care in the establishment of an LLC to insure pass-through tax treatment.
Creating Corporations, Limited Partnerships & LLCs
In order to form a corporation, limited partnership or a limited liability company, you must file the appropriate documents and fees with the Georgia Office of the Secretary of State. The filing fee for creating each of these entities is currently $100.00. Filing instructions and forms are available online at the Secretary of State website. Additionally, the filing can be accomplished completely online for corporations and llcs.
Though it is no longer required, you may reserve your business name for a period of 30 days prior to filing your documents for a $25.00 fee. Keep in mind that although these entity names do go through an approval process to remain distinguishable on the Secretary of State records, their approval does not guarantee you exclusive rights to a name in the event of a legal dispute. Name protection is a very complicated process and should be discussed with a qualified attorney if it is of great importance to you and your business.
An important requirement of each of these entities placed on file with the Secretary of State is the listing of a registered agent. The registered agent is the "official mailbox" for the entity. He or she is the person or entity designated to receive any lawsuit or other official communication. The registered agent is not required to be an owner, shareholder, partner or officer of the entity. Many use an attorney or a professional corporate service company for this service. The registered agent's address must be a street address in Georgia, and the agent must be physically located at that address. A post office box or "mail drop" may not be used as the registered agent address.
After successfully filing your documents, you will be required to file an Annual Registration with the Secretary of State's office each year to keep information current. Georgia corporations file the first registration within 90 days of the date of incorporation, and between January 1 and April 1 each year thereafter. Limited liability companies and limited partnerships file the first registration between January 1 and April 1 of the year following the initial filing, and between January 1 and April 1 each year thereafter.
Office of the Secretary of State
315 West Tower
2 Martin Luther King Drive
Atlanta, GA 30334
At the time of incorporating, corporations are also required to publish a "Notice of Intent to Incorporate" with the legal organ of the county of their registered agent. There is a standard fee of $40.00 for this service as outlined by O.C.G.A. � 14-2-201.1.
The legal organ for Haralson County is:
The Haralson County Gateway Beacon
P.O. Box 685
Bremen, GA 30110
If the process of forming a corporation, limited partnership or limited liability company seems overwhelming, an attorney can usually perform the necessary procedures for you.
Creating Sole Proprietorships and General Partnerships
In order to form a sole proprietorship or general partnership, the only documentation needed is that required of your local jurisdiction. In most cases, for a sole proprietorship, this is simply a business license. A general partnership should have a general partnership agreement drawn up but it may not be required to be on file at any specific agency. A good place to start is to check with the Clerk of Superior Court in your area.
Haralson County Clerk of Superior Court
4485 GA Hwy 120
P.O. Drawer 849
Buchanan, GA 30113
NOTICE: The information contained within this publication is given for informational purposes only and should not be construed as legal or professional advice or assistance. Laws and information contained herein are from multiple sources and are subject to frequent changes. While this publication will be updated annually to capture those changes, you should consult a licensed professional when dealing with legal and financial matters regarding your specific situation. You should also verify the other information contained herein to be sure that you have the most current and accurate information.