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This is part of my blog series following the creation of my new art studio/children’s book business, “Rosie & Lucy Creative Enterprises.” I recently filed paperwork with the state, and “Rosie & Lucy Creative Enterprises, LLC” has officially been formed! In that spirit, this post discusses forming a corporate entity. This post is meant as a general summary of common types of business entities and how they function.
A. Common Types of Business Entities
For general summary purposes, here are some of the most important types of business entities that cover the vast bulk of circumstances:
- Sole Proprietorship – You automatically operate as a sole proprietorship the minute you start to conduct business. You don’t need to file any paperwork. You can operate a sole proprietorship in your individual name or a trade name. If you operate under a trade name, you may want to file an Assumed Business Name Certificate with the N.C. Secretary of State. This is also something a business lawyer would also be able to assist you with.
The main downside of a sole proprietorship is that you individually bear all responsibility for your business. If your business goes “belly-up,” then your creditors can come after you personally to pay your business debts. The same is true if your business is found liable for negligence or some other type of claim; you could potentially be held individually liable.
- Partnership – You automatically operate a partnership when you conduct business with business partner(s). If you and your partner(s) each have managerial and operational control over the entire business, you are general partners. You can also have limited partners who manage a limited portion of the business, or otherwise have limited managerial roles. In North Carolina, partnerships are governed by the N.C. Uniform Partnership Act, N.C. Gen. Stat. § 59-31, et seq.
If you form a business partnership, you can also have a private, binding Partnership Agreement that governs how the business operates within the confines of the N.C. Uniform Partnership Act. I strongly recommend having a formal written and signed Partnership Agreement that clearly defines the duties, rights, and responsibilities of the partners.
Partnerships have similar downsides to sole proprietorships in that you individually bear individual liability for the business. And even more worrisome, you can bear liability for the business acts of each of your business partners – a reason to choose your business partners wisely!
- Limited Liability Company (LLC) – In North Carolina, LLCs are governed by the N.C. Limited Liability Company Act, N.C. Gen. Stat. § 57D-1-01, et seq.
One huge advantage of an LLC is that, like its name implies, it limits your individual liability. Unlike in a sole proprietorship or partnership, if an LLC goes under, it may lose all its business assets, but your personal assets like your home, personal bank account, etc., would be protected in most circumstances. In terms of business debts, this means that if you start a business by forming an LLC, the worst that can generally happen is you lose the time, resources, and assets you allocated to the business, nothing more. Business creditors can’t come after you personally. And if some sort of claim against the business arises, you would be similarly personally protected.
Another advantage of LLCs is that you do not pay tax at the corporate level, but only pay personal income tax on income you derive from the business. This is sometimes called “pass-through taxation.” It’s a very good thing for you as a business owner not to be taxed twice if you don’t have to.
An owner of an LLC is called a “Member.” If you form an LLC, and especially if you are forming an LLC with other people, it is strongly recommended that you also have a private Operating Agreement signed by all the Members. This is similar to a Partnership Agreement for a Partnership, or Bylaws for Corporations. An Operating Agreement is the key corporate document that controls the rights, responsibilities, and limitations on Members. For instance, you can require unanimous approval of the Members for big business decisions, you can control how new Members are admitted or removed from the business, in what circumstances the business can be dissolved, etc. This is something a lawyer can assist with to tailor to your particular business circumstances.
Especially if you are operating a smaller start-up business, you may want to consider making an “S Election” by filing Form 2553 with the IRS. Without going too much into the byzantine minutia of tax law, an “S Election” references a tax regulation where your LLC can elect to be treated as an S-Corporation for tax purposes, which in many circumstances can allow you to save on self-employment taxes. Whether or not making an S Election is best for your particular business is something a business lawyer could advise you on.
You can form an LLC by filing paperwork with the Secretary of State in the state where your business is located and operates. Information on how to file the LLC paperwork, including forms and filing fees, is available at the N.C. Secretary of State’s website here and here.
- Corporation – In North Carolina, corporations are governed by the N.C. Business Corporation Act, N.C. Gen. Stat. § 55-1-01, et seq.
Corporations limit your individual liability very similarly to LLCs. In terms of choice of corporate entity, they have that same added benefit over sole proprietorships and partnerships.
If you form a C-Corporation, you will generally have to pay corporate income tax, in addition to paying personal income tax on income you derive from the business. This is sometimes called “double taxation.” You can avoid that by forming as an S-Corporation. There are benefits and downsides to both C-Corporations and S-Corporations, and discussing which would be best for your particular business is something a business lawyer can assist with.
If you are forming a corporation, you need to have Bylaws as well. This document governs how the corporation operates administratively, similarly to the function of an Operating Agreement for an LLC.
You can form a corporation by filing paperwork with the Secretary of State in the state where your business is “domiciled.” For all general intents and purposes, this means the state where your principal office is located and where you conduct most of your business. Information on how to file the corporate paperwork, including forms and filing fees, is available at the N.C. Secretary of State’s website here and here.
- Non-Profit Corporation – Non-profits operate similarly to for-profit businesses, aside from the obvious fact that they are not meant to produce business profit. Non-profit corporations are regulated by the Secretary of State in the state where they operate, and are formed by filing Articles of Incorporation with the N.C. Secretary of State. If you want to form a non-profit, it is strongly recommended that you consult with a non-profit lawyer, as there are specific regulations and requirements that govern non-profits. More information about forming non-profits, including forms and fees, can be found on the N.C. Secretary of State’s website here and here.
- Professional Corporation or PLLC – If you work in a licensed and/or regulated field, such as law, medicine, engineering, architecture, etc., you may have to register your business as a Professional Corporation or PLLC rather than a standard corporation or LLC. They function very similarly, but also take into account additional items related to professional requirements. More information on professional business entities, including a list of applicable professions, is available at the N.C. Secretary of State’s website.
The business entities described above cover the vast bulk of business situations. There are also numerous other types of special business entities out there, such as LLPs, Joint Ventures, Syndicates, ESOPs, Joint Stock Companies, Business Trusts, Cooperatives, etc. These special business entities are meant for very specific business scenarios, and are options a business lawyer can advise you on, if your circumstances are applicable.
B. Multi-State Businesses
If your business operates in multiple states, you will likely need to register as a “foreign” corporation with the Secretary of State in each additional state where you operate. If you conduct multi-state business, you should probably consult with a business attorney to make sure you comply with all applicable laws and regulations in each jurisdiction.
C. Resources
The North Carolina Secretary of State maintains a wonderful Help Center for people starting new businesses, located here.
And if you have any questions, feel free to contact our law office at peter@isakofflawoffices.com or 757-478-3144.
The information provided on this website does not, and is not intended to constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; the ABA and its members do not recommend or endorse the contents of the third-party sites.
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