1. Legal Services of Easern Missouri’s CED PROGRAM Presents:
Legal Workshop for Entrepreneurs:
Choice of Entity
January 26, 2011

2. Choice of Legal Entity: Overview
Factors to consider
Primary types of legal entities

3. Major considerations Liability Taxation Formal requirements and fees
Management and control of business
Ability to transfer ownership
Continuation of business

4. Types of Legal Entities
**Sole Proprietorship
**General Partnership
**Corporation
**S Corporation
Statutory Close Corporation
**Limited Liability Company
Limited Partnership
Limited Liability Partnership

5. Sole Proprietorship Business owned by one person
Duration limited to life of owner
Tax treatment
Report business income and expenses on individual tax return
Taxed at ordinary income rates
Business losses can offset other gains
Unlimited liability

6. Sole Proprietorship – Unlimited Liability
Owner personally liable for debts and lawsuits
Possible liability for acts of agents and/or employees
Liability continues after business terminated or sold
General business insurance can provide some protection
Homestead Exemption can give some protection for your home

7. Sole Proprietorship -- requirements
Few formal requirements
Register fictitious name with Secretary of State
Pay self-employment tax on wages
File gains and losses on personal tax return

8. Sole Proprietorship – Pro’s and Con’s
Benfits
Pass through taxation
Easy to form and maintain
Maximum flexibility and control for owner
Drawbacks
Unlimited liability
Difficult to get investments

9. Sole Proprietorship – Practical Tips
Sufficient for most start up companies with one owner/investor
Non-retail businesses (e.g., consulting, other service businesses, home-based businesses)
Obtaining adequate insurance is critical

10. General Partnership Business conducted by 2 or more people
Includes a business owned by a husband and wife
Not a distinct legal entity
Partnership ends when:
One partner dies, files for bankruptcy or leaves the business
One partner can force dissolution by court order
Transfer ownership – all partners must agree

11. General Partnership Tax treatment Unlimited liability
Each individual partner files income and expenses on personal income tax return
Losses from partnership may offset other personal gains
Unlimited liability
Each partner has unlimited liability for debts, obligations and wrongful acts committed by any partner
Liability continues after even after leave the partnership

12. General Partnership -- Requirements
Few formal requirements and fees
Register fictitious business name with Secretary of State
Pay self-employment tax on wages received
File gains and losses on personal tax return

13. General Partnership – Pro’s and Con’s
Benefits
Pass through taxation
Easy to create and maintain
Drawbacks
Easy to form
Unlimited liability

14. Partnership -- Formation
Can be formed through oral agreement or actions
If share profits with someone
(Paying someone wages does not create a partnership)
Create public perception that business is a partnership

15. Partnership – Practical Tips
Written partnership agreement is essential
Provides flexibility
Defines relationships among the partners to fit the needs of the business
Minimizes risk of disputes
Seek legal assistance to prepare
All partners must understand their rights and responsibilities under the agreement

16. Corporation Independent entity, separate from owners
Owned by stockholder/s
Managed by a board of directors and officers
MO law requires only one director
Must have President and Secretary

17. Corporation Unlimited duration No personal liability
Easy to transfer ownership interests
Taxation:
Pay corporate taxes on net income
Stockholders taxed on profits distributed as dividends

18. Corporation . . . Taxation continued
More items can be deducted as business expenses
Can deduct fringe benefits for employees
E.g., cost of health insurance
For all other entities, owner/s must include as wages

19. Corporation -- Requirements
Obtain federal EIN number
File articles of corporation with MO Secretary of State
Filing fee $58 if business has $30,000 or less
Form 2643: MO Tax Registration Application

20. Corporation -- Requirements
File Federal and State corporate income taxes
Must file annual report
$40 paper
$20 online

21. Corporation – Pro’s and Con’s
Benefits
Liability protection
(personal guarantee often required )
Easy to transfer ownership interests
Easier to raise $
Drawbacks
2 levels of tax
Formalities to create and maintain

22. Corporation – Drawbacks cont.
Must adhere to corporate formalities
Ongoing federal and state filing requirements
Must hold regular meetings of board and shareholders
Record keeping

23. Corporation – Drawbacks cont.
Avoid “Piercing the Corporate Veil”
No commingling funds
Pay yourself and other owners a salary
Transact all business in corporation’s name
Sign agreements in corporation’s name
Advertising, correspondence etc in corporation’s name
Follow corporate formalities

24. S Corporation Similar to a C Corporation EXCEPT:
Corporation does not pay federal income tax
Pass through taxation like partnership or sole proprietorship
Owners must pay self employment taxes on wages
More limitations with tax allocations
(e.g., no special allocations of profits and losses)
Must file IRS Form 2553 to get special tax status

25. S Corporation -- Limitations
Stockholders limited to US citizens or permanent residents
All stockholders must be individuals
(e.g., no corporations can invest)
Only one class of stock
Maximum of 100 stockholders
Tax year must be calendar year

26. S Corporation –Practical Tips
Depending on personal income tax rate, C corporation could be better option
Consider how owners are paid – dividends or wages
Consider need to build capital

27. Limited Liability Companies
Combines attributes of corporation and partnership
No personal liability like a corporation
Pass through taxation like a partnership
Owned by member/s
Managed either by member/s or manager/s

28. Limited Liability Company
Duration limited but can be perpetual
Taxation:
If one member, tax same as a sole proprietor
If two or more, tax same as a partnership
Federal self-employment tax

29. Limited Liability Company
Management:
Statutory default is member managed
Articles can change to managers
If managers, members cannot bind the LLC
If members manage, member action binds LLC
Transfer ownership:
Statutory default is only economic interests transfer

30. LLC -- Requirements
Must file articles of organization with Secretary of State
$105 paper filing, $50 online
Name must contain “lc”, “llc”, limited liability company, or “limited company. “ Cannot have “corporation”, “incorporation” as part of name

31. LLC Requirements cont.
File profits and losses on personal income taxes
Self-employment tax for member employees
Avoid “piercing the corporate veil”
Must have an operating agreement

32. LLC Requirements – Operating Agreement
Governs conduct of business
Sets forth rights, duties and obligations of members
In MO can be oral (BAD IDEA!!)

33. Limited Liability Company
Benefits
Flow-through taxation
Liability protection
Flexible management structure
Few corporate formalities and filings

34. Limited Liability Company
Benefits cont.
Allocating ownership interests flexible
Can be based on services provided, not $
No limitations on types of stockholders
Drawbacks
Can be difficult to transfer full interests
Tax filings can be complicated

35. Closed Corporation Similar to a C corporation EXCEPT:
Stockholders generally know each other
Stockholders also active in management
Restrictions on sale of stock
No requirement to have board of directors, hold meetings or have bylaws

36. Closed Corporation --Requirements
Articles must state that corporation is a statutory closed corporation
50 or fewer shareholders
Can only transfer ownership interest if
sell back to corporation or
All stockholders agree

37. Closed Corporation – Pro’s and Con’s
Benefits
Maintain more control
Articles can eliminate board of directors, stockholders can manage corp.
Articles can state who can be a stockholder
Drawbacks
Same as C corporation
Can be difficult to leave the business

38. Limited Partnership Similar to a General Partnership EXCEPT:
Comprised of at least one General Partner and at least one Limited Partner
Can be individual/s or entity/ies

39. Limited Partnership Similar to a General Partnership EXCEPT:
General Partners have unlimited liability
Limited Partners have liability protection
Provided they do not help manage the business
File application for registration with Secretary of State

40. Limited Liability Partnership
Similar to General Partnerships EXCEPT:
Partners not liable for debts and liabilities incurred by partnership
Still liable for acts of other partners
Partnership does not dissolve if one partner withdraws.

41. Limited Liability Partnership
Must file application for registration every year OR
Automatically revert to General Partnership
Law less settled

42. Useful websites Missouri Secretary of State Business Divisions: