The legal choices are plenty when creating a business

Editor’s note: Michelle Stockman works with Little Rock-based Arkansas Capital Corp. to promote entrepreneurship development around the state. Stockman earned a bachelor’s degree from Loyola University-Chicago in communications and fine arts, and earned a master’s in entrepreneurship from Western Carolina University. Her thoughts on business success appear each week on The City Wire.

To start a business, one of the first steps to engage in is deciding what type of business should be started. Is it best for the business to stay a sole proprietor or seek a partnership? If the business owners prefer a legal veil of protection to engage in the business, the question becomes what type of incorporation should I establish?

So what are the options in selecting a business type and what do they mean? While it is good to consult with a good small business accountant about what form of business will suite your business needs the best, the following summarizes the basic information from the Secretary of State’s Office any business owner should know:

Sole Proprietorship
This is a business with a single owner with no formal or separate form of business structure. The owner has sole control and responsibility of the business. A sole proprietorship is easily formed, allows important decisions to be made quickly, and typically has fewer legal restrictions. In this situation the owner and the business are indistinguishable, meaning if the litigation in brought up against the business, the litigation is also brought against the owner as well.

Partnership
A partnership is an association of two or more persons acting as co-owners of
a business and can be created by an oral or written agreement between the parties involved. However, a written agreement is highly recommended. This agreement should set out the responsibilities and obligations of the partners and percentage of ownership.

Limited Partnership
Limited partnerships (LP’s) are more intensely regulated than general partnerships. LP’s consist of general partners and limited partners. The general partner(s) manage the business and have no liability protection. The limited partner(s) are usually investors that are not involved in the day-to-day running of the business and whose liability is limited to the extent of their investment.

Limited Liability Partnership
A limited liability partnership (LLP) is much like a limited partnership. However, the LLP allows all the partners to take an active role in the management of the business while offering members some liability protection from actions of the other partners. LLP’s are most often used by groups of professionals such as doctors, accountants or architects.

Limited Liability Limited Partnership
A limited liability limited partnership (LLLP) is a limited partnership which registers with the Secretary of State as an LLLP. The effect of registration is to limit the vicarious liability of the general partners in the same fashion that registration as an LLP limits the liability of the general partners of a general partnership.

Corporation
A corporation, a more complex form of business organization, is a legal entity and exists apart from its owners or shareholders. As a separate entity, the corporation has its own rights, privileges and liabilities apart from the shareholders, officers and board of directors. A corporation can buy and sell property, enter into contracts, sue and be sued. Elected officers and its board of directors manage the corporation.

S Corporation
The S Corporation is a corporation that chooses to be taxed under Subchapter S of the Internal Revenue Tax Code. Being an S Corporation is a tax matter only. S Corporations are “tax pass through” business entities, meaning their profits and losses are reported by its owners on their personal tax returns.

Limited Liability Company
The Limited Liability Company (LLC) combines many favorable characteristics of corporations and partnerships. The LLC provides limited liability to its members and offers them the same IRS tax treatment as partnerships.

Nonprofit Corporation
Nonprofit corporations are created for public benefit, for mutual benefit for its members, or for religious purposes. Nonprofit corporation status does not guarantee that the organization will be granted tax-exempt status, nor does it ensure that the contributions to the organization are tax deductible. Becoming a nonprofit corporation is generally a prerequisite for tax-exempt status under IRS Code, such as section 501(c)(3).

Commercial Registered Agent
A commercial registered agent is an individual or entity that is in the business of providing registered agent services for registered entities in Arkansas. The primary purpose of the commercial registered agent is to accept service of process on behalf of the entity it represents.

Nonfiling/Nonqualifying Entity
An entity that is not required to file or register in order to transact business in the state may choose to file a Nonfiling/Nonqualifying Entity Statement. This filing allows the entity to have its registered agent/service of process information on file with the Secretary of State.

Feedback
Stockman can be reached at [email protected]