Businesses may be structured in a variety of ways, each
with its own advantages and disadvantages. Following is a brief overview of some
of the more common business structures
and the associated registration forms that must be filed with the Secretary of State’s Office. It may be necessary to obtain for your business additional forms or state and local licenses. The Secretary of State's Office strongly recommends that you consult with an attorney, accountant, financial adviser, and/or banker to help you determine which structure best suits your needs.
An assumed business name is a “trade name” or “fictitious business name” under which the business or operation is conducted and presented to the public. It is not the legal name of the person(s) who actually owns the business. An assumed business name must be distinguishable on the record from an assumed business name that is already registered or from any corporate name, limited partnership name, limited liability company name, limited liability partnership name, trademark, or service mark registered or reserved with the Secretary of State.
Individuals who choose to own a business under an assumed business name can register the name and declare that they are sole proprietors. A sole proprietor is a business owned personally by one owner. An assumed business name can be used by:
- a sole proprietor,
- a corporation,
- a partnership,
- a limited partnership,
- a limited liability company,
- a limited liability partnership, or,
- an association.
This type of business is owned by a single individual. A sole proprietor has total control of and responsibility for his or her business, receives all profits, and can make important decisions quickly. The sole proprietor is responsible for all taxes and liabilities of the business.
If you plan to start a sole proprietorship and you are not planning to do business under your own name, you must file an Application for Registration of Assumed Business Name with the Secretary of State's Office. Otherwise, no registration is required. You must obtain any necessary state and local business licenses.
A partnership is an association of two or more people acting as co-owners of a for-profit business. Individuals may create a partnership by oral or written agreement. Under this arrangement, the partners share personal liability for all claims against the partnership, as well as share all profits and losses. Profits are taxed as personal income for each individual partner.
A general partnership may register with the Secretary of State by filing an Application for Registration of Assumed Business Name. The filing fee is $20. A partnership agreement is generally maintained by the partnership itself. However, if you choose, you may file a partnership agreement with the Secretary of State's Office once the application for registration of assumed business name has been filed and there is a $20 filing fee to record the agreement.
A limited partnership is more closely regulated than a general partnership. There must be at least one general partner who manages the business and who is fully and personally responsible for claims against the business. In addition, there are investors who play no part in the management of the business and whose liability for the business is limited to the extent of their investment.
A limited liability partnership operates much like a general partnership, except none of the partners can be held personally liable for claims against the business. Partners are not liable for the errors or negligence of the other partners or their employees unless they themselves are supervising, directing, or involved in the action for which a claim has been filed.
A limited liability limited partnership is a business entity similar to a limited partnership except that is offers extended protections for liability of the general partners.
A corporation is a more complex form of business organization. It exists apart from its owners or shareholders and is a legal entity in its own right. As a separate entity, it has its own rights, privileges, and liabilities apart from the individuals who form it.
A corporation has shareholders who invest money in the business and therefore own it. The shareholders hold an annual meeting at which they elect a board of directors. The board makes policy decisions for the company and selects the corporate officers who manage the company's daily affairs.
A corporation affords limited liability to its shareholders and can continue on after the death of or transfer of shares by one or more of the owners. A corporation pays taxes on its profits and its shareholders pay taxes on dividends.
There are several types of corporations; some operate for profit and others are not for profit. An attorney can advise you as to which type best suits your needs.
Among these types are:
- S corporations. S corporations generally do not pay taxes. Profits or losses are passed on to the individual shareholders' gross incomes for tax purposes. You must apply to the Internal Revenue Service to get S corporation status. The IRS places limits on who can be a shareholder.
- Statutory Close corporations. This type of structure allows a business to eliminate many of the formalities of a standard corporation. For example, the business can elect to operate without a board of directors. A shareholder of a statutory close corporation may not sell shares in the business without the approval of the other shareholders.
- Public Benefit corporations. These profit corporations create a material positive impact on society and the environment and meet higher standards of accountability and transparency.
- Professional corporations. Individuals who are licensed in certain professions may form a professional corporation. This provides them with the benefits of a corporate structure for the business aspects of their practices while preserving the personal and professional relationship between them and the clients they serve. Shareholders may only be people who are licensed to render the specific professional service; at least half of the officers and directors must also be licensed. A professional corporation must file Articles of Incorporation with the Secretary of State and provide a copy of the filed articles of incorporation with each licensing authority having jurisdiction of a type of professional service described in its articles of incorporation.
- Nonprofit corporations. These are established solely for the benefit of charitable, religious, educational, or scientific purposes. No earnings are distributed to members, trustees, officers, or other individuals, except for compensation for services rendered. A nonprofit corporation is exempt from income tax. You must apply to the IRS to receive nonprofit status.
A nonprofit corporation may take one of three forms:
- A public benefit corporation operates for public or charitable purposes. Members may not sell their interests or receive distributions from the organization.
- A mutual benefit corporation exists to serve its members. Trade associations, social clubs, and fraternal organizations are examples of this type of nonprofit. Members are given broader voting rights and, while not entitled to receive distributions while the organization is operating, they are entitled to sell their memberships and receive distributions when the organization dissolves.
- A religious corporation is treated much like a public benefit corporation.
This form of business structure offers both the protections from personal liability of a corporation and the favorable tax treatment of a partnership. It provides for flexibility in the contribution and distribution of assets.
Under this type of structure, annual meetings are not required, but Articles of Organization and annual reports must be filed with the Secretary of State's Office.
Professional limited liability companies have the same requirements as professional corporations (see above).
As with a general partnership, profits are taxed as personal income for each individual partner.
A series limited liability company has the ability to partition its assets and liabilities among a set of separate limited liability companies. Each limited liability company may have different assets, economic structures, members, and managers. The profits, losses, and liabilities of each are legally separate from the others in the series, thereby creating a firewall between each entity. It also offers advantages of a partnership while limiting the liabilities of the members and series members.