Business law includes the creation of new businesses and managing the issues that arise between a business and its customers, employees, partners, and others. We can help you avoid costly litigation by preparing you and your business for the expected and unexpected.
From choosing the appropriate business entity to having effective documents in place, a little bit of planning goes a long way in the business world. We can help you ensure that the foundation of your business is solid and able to withstand even the strongest challenges. When structured appropriately and set up properly, a business entity can shield its owners from personal liability associated with the business.
Business Entities: An Overview
The most common business entities include corporations, limited liability companies, and others. Each of these entities can be further customized to meet the needs of its owners, achieve maximum tax savings, and further the purpose of the business.
One of the oldest business forms, corporations are common place in our society. A corporation is independent of its owners—referred to as shareholders—and offers a lot of protection from personal liability. A corporation is managed by a board of directors who then select the corporation’s officers who run the day-to-day operations. A corporation is required to follow certain formalities that include holding annual meetings of the shareholders and regular meetings of the board of directors. Whether there are thousands of shareholders or just few, all corporations must following these formalities in order to effectively protect their shareholders.
A corporation is governed by its bylaws that are rules adopted by the board of directors. The Bylaws establishes how the corporation will be governed, including such things as how, when, and where meetings of the shareholders or board of directors will be held, the process of electing directors, the various officers and corresponding powers and duties of each, and the appointment of the officers. Typically, the bylaws do not govern the relationship between the shareholders, which is usually addressed in a separate Shareholders Agreement.
Traditionally, a corporation has been taxed separately from its shareholder…often resulting in double taxation. This type of structure is commonly referred to as a C-corporation. While there are times and reasons where this structure is appropriate and beneficial, most small business owners prefer to avoid the double taxation by opting to be taxed as a small corporation or S-corporation. This means that the profits of the company are taxed on the individual shareholders’ tax return and not on the corporation’s tax return.
LIMITED LIABILITY COMPANIES
Limited liability companies—or LLCs—are fast becoming the dominant business entity throughout the country. The primary reasons for this is that LLCs provide the owners—referred to as members—with protection from personal liability, but in most cases do not require the members to comply with the formalities of a corporation. Further, LLCs are taxed in the same manner as a sole-proprietor or partnership, which means no double taxation. An LLC can, when appropriate, choose to be taxed as a small corporation or S-corporation.
Additionally, the LLC has more flexibility than a corporation in its ownership structure and the division of its profits and losses. Unlike a corporation where the division of profits and losses is directly correlated with the number of shares a shareholder owns, an LLC can structure itself so as to divide the profits and losses differently than the members’ interests. For example, in a corporation, if shareholder owns 10% of the corporation’s shares, that shareholder will receive 10% of the corporation’s profits or losses. An LLC can allow certain members to receive a higher or lower percentage of the company’s profits without adjusting the ownership of each member. For example, a member that owns 10% of the company may receive 50% of the company’s profits for a set period of time or until that member’s contributing money is paid back. Thereafter, the member would receive only its corresponding 10% of the profits. During the period that the member is receiving a higher percentage of profits and losses, that member does not have more say in the management of the company…it maintains only 10% of the management decision-making authority.
An LLC is governed by an operating agreement, which operates somewhat like the bylaws of a corporation. In most operating agreements, the relationship between the members is also addressed, which avoids the need for a separate agreement like a shareholder agreement. In some states, an LLC’s operating agreement can be verbal, although we do not recommend this. If an LLC chooses, it can opt for the statutes of its organizing state to act as its operating agreement.
Customers are the life-blood of every business! However, customers can also be the greatest source of stress and dangerous if the relationship is not founded on good documentation. Ensuring that the proper documents are in place before you transact business can help you avoid this stress and its related expense.
Many commercial transactions can be handled by the business owners without the need of an attorney. However, if your business is highly regulated having a trusted attorney on your side can help you avoid pitfalls created by the latest legal developments. Even for seasoned business owners, problems can arise when emotions become involved. A good business attorney can help by providing objective analyses and advice free of emotion. As an outsider dedicated to the success of your business, your attorney can spot issues you may overlook or be too emotionally invested in to see.
Our goal is to help you avoid problems before they arise. This proactive approach allows us as your business attorneys to set the stage and create the facts before there is a problem. This strategic legal maneuvering can save your business money by minimizing your business’s exposure to litigation.