Category Archives: Incorporating or Forming an LLC

Business Basics: Professional Corporations

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Welcome to our weekly business basics post! This week we decided to explore a specialized legal entity called a professional corporation (PC). Now most of those who know a little bit about corporate law probably know that there are two, main types of corporations – S-Corps, and C-Corps. But in addition to these, there are a few other specialized structures that are important to keep under the belt of a small business, like the professional corporation.

So what is a professional corporation?

Like with a regular corporation, converting a sole proprietorship or a partnership into a professional corporation turns the business into its own, separate legal entity. However, unlike a regular corporation, the owner of a business being turned into a professional corporation must be licensed to offer a specialized professional service. In other words, the owner of the would-be PC has to be a doctor, or lawyer, or accountant, or architect; some sort of licensed profession.

Why would someone choose to form a professional corp?

Like a standard corporation, a professional corporation provides a certain amount of protection for the business owner, or owners, as a PC can carry its own debt and liabilities. It is important to note that a PC does not protect an owner from being sued as a result of their own negligence – a doctor that turns his or her practice into a PC, for example, can still be sued for malpractice. But if two doctors act as partners within a practice, forming a professional corporation can help protect one doctor from being liable for any judgement received from a lawsuit against the other doctor. So without that protection, one of the partners could be held accountable for the mistakes of the other one. Professional corporations, then, are very useful for any licensed professional running a practice with another licensed professional.

What do I have to do to form a professional corp?

First, you must be licensed to provide whatever service your practice offers in the state you do business in. Most states will want to see proof of relevant licensure at the time of incorporation, and the state licensing board will likely have to approve your articles of incorporation before you can move forward. Usually the licensing board will ask that the articles of incorporation bear special language and, depending on the state, PCs occasionally have to contend with certain laws after they are formed – for example many states ask that a professional corporation designate itself as such by including ‘PC’ or ‘Professional Corporation’ in the name of the practice.

Professional corporations take a bit more effort to form, but are extremely useful for practices run by two or more licensed professionals. After all, the last thing you want is to have to pay lawsuit that resulted from the negligence of your partner. And, like other corporations, a PC offers some protection from debtors looking to collect on a business’s liabilities. It is important, however, to check with your secretary of state and your state’s licensing board to clarify what, exactly, you must do to form a professional corporation and what special provisions you will have to contend with as a licensed PC.

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Q is for Foreign Qualifications

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We’re onto one of the trickier letters of the alphabet today in our ABC’s of small business segment, but it couldn’t be paired better than with the foreign qualification which answers the question of what a small business should do if they want to legally operate their business in a state that may not be the same one they created the formation in.

Foreign qualifications break down a little like this. If a business wants to operate outside of the state that they formed a formation with, they need to register their business as a foreign corporation in order to obtain that kind of authority. And in many cases, this is a requirement, especially if your company expects to transact business outside of the state lines that they were formed in.

By registering their business, and working alongside a company that can help them file, all foreign qualifications documents are prepped for your review and submission to the appropriate state agency in any state so that your corporation or LLC may operate as a foreign entity within that state.

Still have further questions (that’s our second “Q” reference, turns out it’s not a tricky ABC of small business after all!) about filing a foreign qualification? Give us a call at 1 (877) 692-6772 and we can help you get started!

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Business Basics: Benefit Corporations

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One of the main reasons we chose to start this blog was to help explain the facets and aspects of business that typically get overlooked. To help us do this, we decided that, every Tuesday, we are going to post a new “Business Basics” piece to discuss subjects that readers, despite being aware of, may not know much about. With that in mind, one of the first subjects we are going to look at is the Benefit Corporation.

What is a Benefit Corporation?

Benefit corporations are a fairly recent, though the practice of chartering a particular mission for a corporation has existed for centuries. Early American corporations were occasionally given a particular public service to fulfill – things like building bridges or maintaining roads. However, the modern benefit corporation is a bit different – instead of merely fulfilling a public service, it has to produce a distinguishable social good for society.

Let’s say that you create a company with a particular social mission in mind – donating ten percent of profits to wetlands preservation, for example. If you wanted to incorporate your business and raise money through selling shares, you would have to give up some control of your company to the shareholders. That could mean that, instead of continuing its social mission, the company merely focuses on producing the maximum amount of profit. Creating a benefit corporation, however, will help ensure your company can continue its social mission, even if that mission cuts into profits. Unfortunately, benefit corporations are not universally recognized, though 12 states have, as of this posting, enacted legislation recognizing Benefit Corporations.

How do you create one?

Requirements vary from state to state, but typically creating a benefit corporation is very similar to the regular process for incorporation. However, along with filling out a standard Articles of Incorporation, you typically have to include some sort of statement attesting that your corporation is a benefit corporation, along with the specific public benefit, or benefits, your corporation will pursue. You can also elect to become a benefit corporation, though doing so usually requires that you amend your governing documents and get approval from the shareholders.

Are there any special regulations or rules for Benefit Corporation?

Benefit corporations are legally required to create a positive impact on society and the environment, and most states require that benefit corporations find a third-party standard to measure that impact. Happily there are many groups that provide a free assessment service, and there isn’t any particular standard that benefit corporations must adhere to. After receiving the assessment, the benefit corporation’s directors create an annual benefit report that they make public and send to the shareholders. Some states also require an independent ‘benefit director’ to sit on the board and prepare a statement on how well the corporation is adhering to its social and environmental mission.

Any benefits?

Except for protecting a corporation pursuing a social mission instead of maximizing profits, there aren’t really any legal or tax benefits to creating a benefit corporation. However, creating a benefit corporation can help you attract socially minded investors. In 2011, the Institutional Shareholder Service compiled a report that states investors are increasingly “incorporating social and environmental considerations into” their decisions. Having a recognized benefit corporation can give you an edge with these types of investors. Just make sure you are committed to your ideals before choosing to form a benefit corporation – in most states that recognize the structure, anyone with more than a 5% share in the company can enact benefit enforcement proceedings if they feel the company is not adhering to its social mission.

Though they can be a bit confusing, the recognition of benefit corporations is a great development in the business world. If anyone reading has further questions, just ask them in the comment box below and we will try our best to answer them!

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O is for Operating Agreement

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This week on the ABC’s of MyCorp, we’re focusing on the letter “O” for operating agreement. State laws are fairly lax when it comes to operating agreements – a handful of states require that an operating agreement be drafted, and even fewer require that Limited Liability Companies hold onto written copies of it. So, typically, LLCs choose to either forgo creating an operating agreement, or simply say that their operating agreement was agreed to orally.

However, the lack of government oversight for operating agreements does not make them any less important or valuable. Even if your LLC was created in a state without laws governing operating agreements, it is still a good idea to draft one and keep copies of it on hand for a few important reasons.

First, it cements your company’s status as an LLC and protects your, and your partner’s, personal liability. Yes, filing the paperwork and making your business an LLC in the eyes of the state does separate your assets from the business’s, but if debtors push you into court, having an operating agreement on hand will help to ensure that the court will see your company as a legitimate LLC.

It also helps to protect you if a business partnership turns sour. Oral agreements are all well and good when everyone likes one another, but how do you prove something was agreed to orally without a tape of the conversation? It is better to be safe than to be sorry, and putting all of the agreements between the members of an LLC into writing will help protect the interests of each and every member.

You should also be sure to clearly outline how ownership of the LLC is distributed amongst its members. Usually the percentage of ownership corresponds to how much investment capital a member gave to the LLC, but LLCs can divvy up ownership percentages on its own terms, and putting those terms and the corresponding percentages in an operating agreement is extremely important, especially if percentage of ownership is not directly influenced by investment.

The same concept is applicable to how an LLC distributes its profits and losses, especially if the LLC chooses to create its own system for its distributive share scheme. Profits and losses for an LLC are normally recorded as income for the LLC’s members as an LLC typically has a pass-through tax structure, and so the operating agreement should outline the system for, and frequency of, the distribution of profit and losses.

Finally, in the case of a member’s death, any agreement on the re-distribution of ownership should be made explicit in the operating agreement. An unexpected death or severe illness can cause a lot of turmoil within an LLC, and the last thing you want is for your business to be torn apart from internal bickering or threats of lawsuits. You can also take steps towards protecting your LLC from being dissolved by specifying specific conditions under which dissolution would be acceptable.

Clearly, an acceptable, comprehensive operating agreement is an essential part of forming a Limited Liability Company, even if your state’s government does not require LLCs to have one. Operating agreements are a great way to protect your assets and your interest in the company, so when you begin preparing to form an LLC, take the time to draft an operating agreement, or have one prepared for you. You’ll be happy to have that extra bit of insurance if things get a little rocky down the road.

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N is for Non Profit

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For our ABC’s of MyCorp this week, we’re focusing on N for Non Profit which is also referred to as an NPO for non profit organizations. As stated on businessdictionary,com, non profits are generally charities, associations, and other organizations formed to further cultural, educational, religious, professional or public service objectives.

Before forming and looking into funding a non profit organization of your own, certain considerations need to be put into place to ensure that the formation is detailed and clear in the societal issue it is working on addressing. You can find out more information about the following eight points at our MyCorp “Forming an NPO” learning center!

1. Figuring out a fundraising plan and annual budget.

2. Incorporating your NPO.

3. Choosing a business name and checking its availability.

4. Preparing and filing the articles of incorporation.

5. Creating bylaws.

6. Holding an organizational meeting.

7. Getting an EIN (Employer Identification Number)

8. Applying for tax exemptions.

But don’t let the length of this list scare you off from taking the time to additionally form a corporation for your non profit! By forming a corporation for your non profit, not only do you will your business be protected and formalized, your personal assets will also be protected with liability protection and you will have established a structure where investors can invest in the business. Best of all, you’ll be providing a public service and meeting a need to benefit others and make a great change in their lives!

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6 Benefits of Foreign Non-Residents Filing Corporations or LLCs in the United States

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It’s a question that’s much more commonly asked than you think – are there any benefits to non-U.S. residents filing corporations or LLCs in the United States or is the process so complicated that it’s best to avoid doing it? The answer is the procedure is fairly similar to what residents of the United States experience filing and that yes, there are a series of great benefits that come in doing so.

1) Limited Liability Companies (“LLCs”) are popular business structures for partnerships and individuals, due to the attractive tax and legal benefits, and personal liability protection that they afford. As a non-U.S. citizen, incorporating a business in the United States is generally similar to the procedure required for a U.S. resident. Because U.S. citizenship and residency are not necessary, non-U.S. citizens are welcome to start or expand on American soil without jumping through any more hoops than a U.S.-born business owner.

2) Company incorporation in the United States is administered at the state level —not the federal level — for both foreign nationals and U.S. citizens. The process will differ from state to state but is generally comprised of two steps: 1.) applying to register in that specific state and 2.) establishing a registered agent with a valid, physical address in the selected state.

3) For foreign businesses, an Individual Taxpayer Identification Number (ITIN) will satisfy the requirement that each business must have a taxpayer number. The Internal Revenue Service (IRS) issues these tax processing numbers to individuals who have to pay U.S. taxes but are not eligible for a Social Security number. Residents and non-resident aliens as well as foreign nationals fall into this category.

4) To receive pass-through profit distributions, a foreign citizen may form a limited liability company. In contrast, all profit distributions (called dividends) made by a C corporation are subject to double taxation. (Under US tax law, a nonresident alien may own shares in a C corporation, but may not own any shares in an S corporation.) For this reason, many foreign citizens form a limited liability company (LLC) instead of a C corporation.

5) A foreign citizen may be a corporate officer and/or director, but may not work in the United States or receive a salary or compensation for services provided in the United States unless the foreign citizen has a work permit (either a green card or a special visa) issued by the United States.

6) If you intend to open a bank account in your home country or if a local company or government office will require proof of the formation of your U.S. Corporation or LLC, you may need to have the company formation documents certified with an “Apostille” or “Certificate of Authentication”. An Apostille, which is an agreement between countries to accept each other’s documents) is only available if your country is a member of the Hague Convention.

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L is for Legal Structure

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We are back with our ABC’s of business – hopefully you didn’t miss us too much! This week the letter is L, and how could we not take that as a sign and talk about a couple of our favorite legal structures? Many business choose to putt around as a sole proprietorship, clinging onto their default structure.
However, choosing to forgo an incorporation or LLC formation may put your personal property at risk if the business does not work out. To avoid this, consider incorporating your business, or forming an LLC.

C-Corps

A corporation and LLC are both legal entities – that means that the business has its own debts and property, separate from your own. However, corporations can be further broken down into two different tax entities, a C-Corp and an S-Corp. The longtime standard, a C-Corp is one of the most commonly chosen types of tax entities. Creating a C-Corp allows those running the business to sell shares to raise revenue, and those with shares can collect dividends. However, C-Corps are prone to double taxation. The IRS will tax the corporation’s revenues in the form of corporate tax, and the shareholders will have to pay tax on their dividends. In order to avoid this, a business owner can choose to elect an S-Corp status

S-Corps

If a C-Corp qualifies by having fewer than 100 shareholders, all of whom are US citizens and are distributed profit and losses according to their interest in the business, it can elect to be taxed as an S-Corp. An S-Corp has a pass-through tax structure, meaning it does not pay any income tax. Instead, the shareholders simply report their profits and losses in their income tax returns. However, both C-Corps and S-Corps are costly to form and maintain, and are highly regulated. If the pass-through structure sounds like something worth pursuing, but you don’t want to form a Corporation and elect S-Corp status, you can form an LLC.

Limited Liability Companies

LLCs are the new kid on the block – they provide the pass through taxation benefit, do not require any annual meetings, and can be formed and run under the leadership of one person. Plus they still provide the sought after separation of personal and business debt. LLCs come with a bit of flexibility as well, as they can choose to be taxed as a Corporation if they qualify. For most this choice will make zero financial sense, but in some cases Corporate tax law might be a better fit for their needs. The drawback is in the novelty of the LLC. There is no uniform law like there is for corporations  and states will vary on how they view and treat LLCs. Still, LLCs offer many of the benefits of incorporation with fewer drawbacks, and are a very popular choice for legal structure.

Now this is just the tip of the iceberg – we put out an info-graphic back in August that goes into a bit more detail, and looks at newer structures like the B-Corp. Every business, and business owner, is different, so if one of these structures sounds like something you’d like to pursue, talk it over with a professional first just to make sure its benefits are applicable to your business. But, for the most part, choosing a legal structure is an excellent step in ensuring that your future, and the future of your business, is a bit more secure.

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How Much Capital Do You Need to Start Your Company?

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The process of starting a business is usually associated with that of accumulating large sums for start-up capital and marketing campaigns. Businesses have now moved away from that sort of thinking and have found easier and more innovative ways to get their companies up and running without having to find an outrageous sum of money. This calls for a total change in the mindset of the budding entrepreneur and a level of commitment to the process.

Starting a Business with Zero Capital

This will be a challenging task with many hurdles to jump, but once you are dedicated to the process you will make it. Here are a few tips.

1. Seek a Partner

Partnerships offer a great means of starting a business. Once you find someone who shares your passion and enthusiasm to become your own boss, then you have covered the first base. If you are really serious about finding someone who shares your vision and is willing to put his/her shoulder to the wheel and help build the business, you must be prepared to treat them like a partner and not a hired hand. If you pay someone for an hour, they will give you your money’s worth, but a partner takes the job more seriously.

2. Start Your Business from Home – Eliminate Expenses

You do not want to start your business with expenses hanging over your head, so eliminate those expenses. Start your business from home to avoid the cost of rent. If you’ve found someone to work with as a partner, then you should both start off doing all the work instead of hiring workers. Work it that way until you reach some point of profitability or some transitional point in the business (expansion) that would require added hands.

3. Get a Business Website Going

Depending on the nature of the business, you could start off with a business website. If the business idea does not require a brick and mortar building, then your first option should be a business website. If you do have a brick and mortar, then you can still have a website up and running in a short time. A good domain name is essential to your online presence, so you would want to spend some quality time selecting one. You can still get a good domain name without spending hefty sums. A free site from WordPress or Tumblr will also be a good starting point. You can start advertising your business through blogs or use the social media platforms, and they are all free.

4. Free Legal Advice and Incorporating Your Company

There are lawyers who offer free services, so you can get legal advice and documents that you can modify to suit your business needs. Incorporating your company may have to wait until you start earning, but until then you can register your company as a LLC, which may be the best business structure for now. You can also go through with the IRS procedure as well.

Jack Harding is a business consultant. He enjoys consulting upstarts and blogging about his insights on various business blogs. Visit Wish.co.uk to see how this upstart utilizes fun marketing to maximize its customer reach.

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Knowing How to Use Patents, Trademarks and Copyrights

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Patents, trademarks, and copyrights are all registered under the federal government which makes it easy for people to think the three are just about the same and get easily confused on how to use each one properly. The biggest difference between the three lies in the rights that they equip owners with and makes knowing the operational difference between these all the more important for owners. No two situations are alike which is why you have patents, trademarks and copyrights available as three different options to protecting intellectual property.

Knowing the applications, strengths, and weaknesses of these three will best help to protect your business for a wide variety of situations and benefit the business in the process. But before you start working with patents, trademarks, and copyrights, it’s important to know how each one varies from the other.

Patents

If you’ve been looking for the strongest law governing intellectual property, patent law is what you should look for. Patent law is based upon a stricter liability standard which makes it the strongest of the three. The knowledge on the patent doesn’t make much of a difference to the treatment of the violator, but the biggest question of importance is whether or not an infringement on the patent claims has occurred and how you should go about taking action.

Strengths

  • Speaking of patents, they have a very strong relationship with reverse engineering. It is through reverse engineering that one comes to know if the patented inventions are in use by another company.
  •  The protection of the underlying ideas is ensured through patents. Unlike a copyright which works to protect the ways ideas are expressed, patent claims are generally laid upon their mechanisms, principles and components.

Weaknesses

  • The biggest weakness of patents lies in their short duration when compared to other tools. Design patents are meant for the protection of the design, shape, configuration and appearance of any invention and are known to last 14 years.
  • Similarly, the utility patents that are meant for the protection of functional makeover and new inventions last no more than 20 years.

Trademarks

Trademarks are media through which businesses ensure their visibility to the world. A logo or name, and not necessarily a description, can be used as a trademark if it brings about the necessary distinction to the business. The following are the strengths and weaknesses of trademarks:

Strengths

  • Trademarks can be enforced for nearly an unlimited amount of time. Proper use of trademarks makes sure it continues to stay all active and working. There are trademarks that are as old as over 600 years! A German beer company by the name of Lowenbrau has a trademark aging 626 years and is a living proof of how surprisingly long trademarks can survive.
  • Trademarks ensure better protection with the help of longer lifespan that they come with. This gives the owners a peace of mind regarding the protection of their intellectual property. 

Weaknesses

  • The trademark law is weak as a whole, but it validates the several exceptions involving fair use as well as competitors’ abilities to approach the mark.
  • Further, it depends on the mark’s inherent strength when it needs to be determined whether or not the competitor is going to be able to produce a mark similar to the original one in case the trademark that is being discussed upon is weak enough from the inside.

Copyrights

Copyrights give people the right to carry out certain operations on some specific materials or products.

Strengths

  • Copyrights are similar to trademarks in that they offer the benefits of a long protection term. These terms are known to originate right at the moment that these are created. It also takes into account the whole life of the author as well as an additional 70 years after his/her death.

Weaknesses

  • The focus is not on the underlying ideas when it comes to copyrights. Fair use exceptions and reverse engineering are common things between trademarks and copyrights. Protection of the expression of ideas is mostly done with the help of these tools.

Intellectual Property – Knowing the applications

It is very important that you keep in mind some of the important strengths and weaknesses of each type of intellectual property. This will facilitate the consultation procedure with an intellectual property attorney and help the fashioning of the portfolio of registrations so that you get the highest level of protection possible.

Proper knowledge on the above three types of intellectual property is going to make it easier for you to apply them appropriately for your business when the need arises. Identify the tool that fits your situation and apply it accordingly. It always pays to prepare well before you take a major leap! 

About the Author

Alden Brooks is the Community Member of Oak View Law Group (OVLG) and has been contributing his suggestions to the Community since 2009. Not just that, he has also made notable contributions through the various articles written on different subjects related to the debt, stock, credit card consolidation, bankruptcy, and more.  

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