Traditionally, Limited Liability Companies are treated like partnerships. Two or more people get together, found a company, form an LLC, and then start running the business. But there’s more than one way to run an LLC. Member-Managed and Manager-Managed Limited Liability Companies are run very similarly, but there are also some key differences that anyone looking to form an LLC should know.
Member-Managed LLCs are, by far, the more common choice. Each member of the limited liability company is treated as equal to every other member, and everyone shares responsibility for the day-to-day operation of the LLC. Continue reading
Limited Liability Companies were, originally, meant to be a replacement for the standard partnership. In 1977, the IRS ruled that it would treat the very first LLC, a Wyoming-based oil company, as a partnership for tax purposes. That meant any money earned by the company would flow through it, directly to the members of the LLC. It wasn’t until 1988, however, that the IRS chose to recognize all LLCs as partnerships, rather than corporations. LLCs are thus, at the federal level, treated as partnerships, which complicates matters for Single Member LLCs. Single Member Limited Liability Companies thus face challenges unique to its business structure – challenges that anyone considering forming a SMLLC should know about and expect.
What are the differences between a Limited Liability Company and a Single Member LLC?
The main difference is right in the name. A single member LLC only has one member, or owner. Limited Liability Companies were primarily created to protect the interests of everyone involved in running the company. The assets and debts of the company were its own, and the assets and debts of each member was their own. If one member misbehaved and owed creditors money, the creditor could not seize control of the LLC – they could only collect on the proportional share being paid to that owner. Likewise, if the company went bankrupt, the personal assets of the members were safe. Single Member LLCs, on the other hand, are not partnerships and it has been up to the state courts to decide how much protection a single-member LLC should really provide.
A Limited Liability Partnership is a very interesting type of business structure. Limited Liability Companies already combine the ease of running a partnership with the protection of a corporation, and the IRS originally ruled that LLCs would be taxed as partnerships. So what is the difference between a Limited Liability Partnership and a Limited Liability Company? And which one would be the best structure for your company?
What is a Limited Liability Partnership (LLP)?
We’ll answer the easiest question first. An LLP is very similar to an LLC – both protect the company’s owners from lawsuits and debtors, and both have a pass-through tax structure, meaning anything the company earns passes through it, directly to the owners, without being subject to any corporate income tax. However, a Limited Liability Partnership offers an extra bit of liability protection to each partner. So, just like in a Professional Corporation, the other partners in an LLP will not necessarily be liable for the consequences stemming from another partner’s actions.
Do all states recognize LLPs?
Yes, though the laws recognizing LLPs vary from state to state. The majority of the states have adopted the Revised Uniform Partnership Act, which includes a provision for LLPs stating ‘An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership.’ In layman’s terms, that essentially means that the company, and not the individual partners, is responsible for any obligations stemming from contracts or torts. The states that haven’t adopted the RUPA instead opted for their own laws to recognize LLPs, but all follow the same basic pattern.
Corporate seals are a remnant of the middle ages, back when official documents were legitimized by a hot wax imprint of a seal or crest. The practice of ‘sealing’ documents kept on throughout the centuries, though the hot-wax method eventually gave way to rubber stamps and paper seals. Today, corporate law still allows for the use of corporate seals, though they are no longer as important as they once were. This week in business basics we answer a few of the most commonly questions we receive about corporate seals, and let you know if you should get one for your own corporation.
What is a corporate seal?
A corporate seal is essentially a signature for your business. When you incorporate, you turn your business into its own, legal entity. Since a corporation cannot sign anything, a corporate seal is used to mark legal and official documentation. These days, most corporate seals are either rubber stamps or steel embossers, and are normally designed to fall apart if tampered with to help avoid fraud.
Do I need a corporate seal?
We have written on non-profit corporations before, but as we only dedicated a sliver of a paragraph to how you actually form a non-profit, we felt the topic was worth revisiting. A non-profit corporation is a great way to fulfill a philanthropic pursuit, and if you are looking at dedicating your life to charity, then running a non-profit may be right up your alley. Forming a non-profit corporation is actually very similar to forming a regular corporation.
Step 1. Find a business name
Your non-profit is going to need a name just like with any other standard corporation. That name needs to be unique and, typically, has to include the a designator like ‘Corporation’ or ‘Incorporated,’ though not all states require that.
Step 2. File your Articles of Incorporation
After you’ve confirmed that your corporate name is available, you have to actually form the corporation by filing what is normally known as your Articles of Incorporation. The forms usually aren’t too complicated, and normally just ask for the names and addresses of the corporation, its registered agent, and its directors, as well as the corporation’s purpose for existing.
Incorporation is one of our specialties, and many of our clients come to us because they want to incorporate their business. After all, incorporation helps protect you in the event of a lawsuit, and forming a separate business entity helps separate the company’s debts from your private assets. However, our customers also often ask us about a real caveat to incorporation – double taxation. After you incorporate, your business has to pay a tax on any income that it earns, subject to the federal and state corporate income tax rates. On top of that, you still have to pay tax on income you earn from working for the corporation. Effectively, this taxes the same amount of income twice, and that heavy burden frightens many small business owners, most of whom don’t have much extra capital to throw around. There is, happily, a way to avoid double taxation, and it is the subject of our Business Basics post for this week – filing for S-Corporation status.
Chapter 1, Subchapter S of the Internal Revenue Code allows smaller businesses to avoid paying federal, and usually state, corporate income tax. S-Corporations are the most popular type of corporation in the United States, with 61.9% of all active corporations filing Form 1120S to apply for S-Corp status.
In order to qualify, your corporation must have fewer than 100 shareholders and issue only one class of stock. If your corporation qualifies, you can file for S-Corp status, which will allow any income earned by the corporation to pass through the business, untaxed, directly to the shareholders. You, of course, still have to pay your personal income taxes, and by law must take a reasonable compensation as a wage. But your corporate income, in most cases, will stay untouched.
Protecting your intellectual property is a vital part of protecting your business. Your intellectual property will essentially define your brand – the very element of your business that consumers associate with all of the goodwill you’ve built into your business. We’ve already talked about trademarks, but this week we decided to look at the other half of intellectual property protection; the copyright. So what exactly is a copyright? And what does registering a copyright even protect?
What is a copyright?
Copyright protection actually dates all the way back to the advent of the printing press. After its invention, it was much easier to copy and sell books. But the printing press also meant that rebellious literature could also be produced much more quickly. This, combined with the threat to the livelihood of the creators of the works being printed, meant the government began to license shops with the right to print copy – and thus the copyright was born. As the decades passed copyright protection became more about protecting the artist, and less about stifling rebellious text, and today we continue to use copyright protections to enforce the rights creators have to their work.
Limited Liability Company formations outpace Corporate formations by nearly two-to-one, so the easy answer to this question seems to be that businesses prefer LLCs. However, what works for one, or even the majority, of businesses may not be right for others. Every company faces its own unique challenges and has its own needs, and even though LLC formation is so much higher than corporate formation, that doesn’t mean that every business will be happy with a limited liability company structure.
The main reason behind why LLCs continue to be so popular seems to be the ease in which an entrepreneur can run an LLC, either by themselves or with a handful of other people. Limited Liability Companies don’t require annual shareholder meetings, nor do they need meticulous notes on every debate that leads to a business decision. Corporations, on the other hand, can be a bit of a pain to run and have to contend with plenty of extra state regulations. But what sort of companies find dealing with those regulations worth the benefits of a corporate structure? And what kind of businesses do better as limited liability companies?
Business Basics started out as a way to educate would-be and current entrepreneurs on the basics of running a business, and has slowly morphed into a place where we can try to tackle some of the most common questions we get about the ins-and-outs of business ownership. But, after looking through a few old posts, we were surprised we hadn’t delved into a very, very important part of running a business – protecting your intellectual property! To help rectify this, here is the first post in a series looking at IP protection. This week we are going to look at the trademark.
What, exactly, does a trademark do?
Studious readers of our MyCorp blog may recall that, back in June, we covered non-profit corporations in a ‘Business Basics’ post, and answered a few simple questions like what a non-profit corporation was and how to form one. This week, we felt it would be a good idea to tackle one of the most often asked questions about non-profits – how do you run a successful non-profit corporation? Now, it’s impossible to distill what makes a non-profit successful into a 700 word post, but we can point out a few things you can do to help your non-profit succeed.
Draft, and adhere to, a solid mission statement
When you form a non-profit corporation, you have to clearly identify your mission. What, exactly, do you hope to accomplish with this organization? Who do you hope to help? What type of a vision do you have? You may have a few fuzzy answers to these questions running through your head, but you have to absolutely solidify every idea and goal you have before you ever hope to begin raising money. If your ‘elevator pitch’ is a jumbled mess of ideals with no, clear, actionable goals, no one will want to donate to your non-profit. The IRS will also review your mission statement when they decide whether or not to grant your group tax-exempt status.