How to Form a Business Entity
Forming a partnership, limited liability company, and other types of business entities can be confusing enough for many people. When faced with the prospect of forming one, it can be tempting just to opt for the “formula” that most online business forms require. Unfortunately, these types of business forms are rarely the best way to go. In fact, they may actually hurt your chances of success.
That’s because when you use these basic steps to form a business entity, you are usually setting yourself up for failure. Sure, these basic steps cover how to create a basic corporation, sole proprietorship, and limited liability company name. But what happens if you don’t have any assets or liabilities?
You’ll probably start by asking yourself, why do I need all this legal paperwork? Most people answer that they want to keep their personal finances separate from their business finances. The problem with this line of reasoning is that personal finances aren’t always separate. And it’s not always easy to make the personal finances separate when you have so many debts running.
Another common argument is that they want to form a partnership for tax purposes. This can actually work, but only if the partners operate under a general partnership framework. To illustrate, suppose you and your spouse have a home-based business. You make $40k a year and your spouse makes nothing. If both of you file joint returns, then you have created a partnership and the tax rules for partnerships are easy to follow.
However, if you want to legally separate your business finances from your own, then you’ll have to get creative. One of the best ways to do that is through an Operating Agreement. An Operating Agreement is a legal document drawn up by both the business and the owners that sets down the terms of the partnership, including who is liable for what, when, how much, and other considerations. An Operating Agreement can save your business a lot of headaches and hassle in the future.
Some business entities also choose to form a corporation. In fact, corporations are more popular than partnerships these days. However, corporations have their own advantages and disadvantages. Forming a corporation requires paying taxes, shelling out money for officers and shareholders, and dealing with local laws. Plus, corporations are not as flexible as partnerships.
Forming a C corporation is very simple. All that’s needed is an article of incorporation that includes all of the necessary elements of a corporation. For example, the C corporation will include the name of the corporation, its address, its filed articles of organization, and its effective date. A C corporation is considered to be separate from its partners and will remain so until it qualifies as a partnership under the law.
Forming a partnership is slightly more involved, but not much. To begin, a partnership must first register its entity with the state. Then, in order to qualify as a partnership, partners must file joint statements with the IRS, which includes all of the partners’ incomes and deductions. All partners must pay appropriate taxes on their income and dividends, depending on their level of liability. If all partners are equally liable for company debt, then the partnership will be considered financially solvent and will be able to settle its debts without going bankrupt.
Forming a corporation requires two things: a legal notice of corporation filed with the state, and an article of organization filed with the IRS. Legal notice of corporation can be filed by any member or members of the corporation, whereas an article of the organization must be filed by a majority vote of the general membership of the corporation. Once the Articles of Organization have been filed with the IRS, all members are legally obligated to pay the appropriate tax to the IRS. Because of this, many businesses choose to use the IRS form.
Forming a C corporation or a partnership does not change the liability of the company, and is usually not required by the IRS. Many small business owners who do not have substantial assets try to save money by using the incorrectly named “form S-corporation”, which is not actually a valid entity and should never be filed with the IRS. Also, many partnerships incorrectly incorporate themselves as a corporation, when they are in fact a partnership.
Forming a business corporation is very simple and easy to do. When you are requesting an IRS form online, you will receive a free calculator that determines the correct filing status. If you have any questions about the necessary forms for your business, you can contact the IRS immediately at the toll-free number on the website. To find out more about how to form a business corporation, contact the IRS directly.