Ryan is kicking my butt with the blog posts and while I was thinking about the many and varied things I could be writing about it hit me that I could and should start at the beginning. I’m going to go over all the crap that we went through, the decisions we made and how we did it… just like Ryan is doing… crap.

Well I’m going to be doing it from a more “analytical” stand point while giving you some reference points, information, and advice.

After choosing our business name (which I’ll let Mr.Roylance explain in a very animated and gesticulated way) we had to get down to deciding what kind of company we were going to be. So we started with a book and then went online and we figured that an LLC will work best for our needs. Now if that sated your need for information feel free to go read something else. If not then keep reading.

C Corporations

• Ownership - It’s owned by it’s stockholders and so there is no limit to owners and also no limit to the classes of stock that can be offered under it.
• Liability of Owners - For the most part there are no personal liabilities for the stockholders when it comes to business operations and problems.
• Main docs needed:
  • Articles of Incorporation
  • By Laws
  • OBR (Organizational Board Resolutions)
  • Stock Certifications
  • Stock Ledger
• Tax info:
  • Corporation is taxed on it’s earnings
  • Shareholders are taxed on their dividends
  • This is known as the dreaded Double Tax
• Management - Board of Directors have all the power and manage the company overall. Officers (CEO, CTO, CMO, etc) handle the day to day operations. From there it just breaks down into VP, director, manager, etc. depending on the size of the company.
• Capital Contributions - Shareholders purchase stock in the company and that money goes to fund the company’s operating costs.

There is a lot of upkeep to a C corp so be prepared to get accountants, payroll clerks, lawyers, and some seriously anal bookkeepers to keep your company from making a very costly mistake. There is a laundry list of corporate formalities and regulations you will need to adhere to when setting up a C corp.

However the man advantage of a corporation is it’s ability to shield the investors from any debts or other liabilities (liked getting sued) that a company may encounter. C corporations are very common despite their double taxation because of he amount of protection it gives the stock holders. Should a C corp go out of business and be millions in debt the only thing that the stock holders loose is the money they used to by the stock.

Lets say Kent setup a C corp selling potted meat product and I decided to buy stock in his company because it sounded like a winner. Two months later he gets sued $10 million for selling it to vegetarian restaurants as TVP I would only be out the $21.50 I spent buying shares of stock in his company.

General Partnership

• Ownership - You can have as many general partners as you want, so go crazy!
• Liability of Owners - Unlimited personal responsibility for the partners!
• Main docs needed:
  • General Partnership Agreement
  • Local filings if you’re going to hold real estate
• Tax info - The company is not taxed because the profits and losses pass through to the partners.
• Management - It’s very democratic, unless otherwise agreed upon each partner has equal management rights.
• Capital - The partners contribute money or services and get an equal cut of the profits and losses (unless otherwise agreed upon).

So long as there are two or more of you involved you can set one of these up, but it’s not recommended except in extreme circumstances. You are all liable for everything in the business.

This means if RoyalAnts was a General Partnership and Adam went on a binge of Taco Bell, McDonalds, grain alcohol, and Mac accessories on the company credit card we would all be culpable when the bill comes due.

If this is the route you choose then make sure you write an incredibly detailed, massively planned out, extremely over worried General Partnership Agreement. Seriously CYA is of the utmost importance here so spend some bones and get a small business lawyer involved to make sure everything is kosher.

Limited Partnership

• Ownership - You can have as many general or limited partners as you want.
• Liability of Owners - Unlimited personal liability for your general partners while, for the most part, your limited partners have no personal liability.
• Main docs needed:
  • Limited Partnership Agreement
  • Limited Partnership Certificate
• Tax info - The company is not taxed because the profits and losses pass through to the partners.
• Management - The general partner(s) manage the business unless otherwise stated in the Limited Partnership Agreement.
• Capital - The partners contribute money or services and get an equal cut of the profits and losses (unless otherwise agreed upon).

You have 1 or more General Partners who is in charge of the whole thing and then as many limited partners who play much more passive (usually finance based) roles in the whole deal. While the General Partner usually has all the management power here, if he goes on a fast food and computer accessories fueled bender the Limited Partners usually won’t be help accountable for the debts. However, if the company goes under they do loose any capital they have invested.

This type of setup is typically considered a “security” by the government so you’ll have to do some research with how that works. I’m not covering that yet, but let’s just say that it’s a bit of a pain in the butt. And just like the General Partnership CYA and get a lawyer involved in drafting your Limited Partnership Agreement.

LLC

(that’s us)

• Ownership - You can have as many members as you want (Me, Ryan, Kent, and Ryan are all equal owners).
• Liability of Owners - For the most part there is no personal liability for the members.
• Main docs needed:
  • Articles of Organization
  • Operating Agreement
• Tax info - The company is not taxed because the profits and losses pass through to the members.
• Management - The Operating Agreement designates who manages the business. Can be a democracy or a dictatorship, all depends on the OA.
• Capital - The members contribute money or services and get an equal cut of the profits and losses (unless otherwise agreed upon).

LLCs are a relatively new hybrid of multiple business platforms. It combines many of the features of partnerships and corporations while having some unique features of it’s own. Some states(like Utah) even allow for a single person to incorporate themselves as an LLC.

There is no limit on investors with an LLC. Taxes, income, and losses are passed through to the owners (called members) so there is no double taxation. The key to building a solid LLC is the Operating Agreement so that everyone involved knows what’s being done and how they are treated under the company. The main draw for an LLC is that the members are not liable for the businesses debts and such like with a corp.

This is what RoyalAnts is, for an example of how this all turns out just stay tuned and keep reading the blog.

S Corporations

• Ownership - There is a cap of 75 shareholders with only 1 basic class of stock offering.
• Liability of Owners - For the most part there are no personal liabilities for the stockholders when it comes to business operations and problems.
• Main docs needed:
  • Articles of Incorporation
  • Bylaws
  • Organizational Board Resolutions
  • State and IRS S Corp election
  • Stock Certificates
  • Stock Ledger
• Tax info - Usually the S Corp is not taxed and the profits and losses are passed through to the shareholders.
• Management - Board of Directors have all the power and manage the company overall. Officers (CEO, CTO, CMO, etc) handle the day to day operations.
• Capital - Shareholders purchase stock in the company and that money goes to fund the company’s operating costs.

The S corp is another popular entity for startups because of it’s ability to sell basic stock to investors (up to 75 total). The corporation itself is not taxed because any of the profits or losses are passed through to the shareholders. Who in turn claim the profits and losses on their personal income. There are restrictions on amounts claimed for losses (generally no more than they put in) so be sure to look at the laws and consult a CPA when setting up this kind of corp.

Another great thing about the S corp is that the election of entity isn’t permanent, it can be changed at a later time should things change. It sounds pretty great so far, but there are several states that don’t allow this type of setup so you’ll have to do some research on your own. Also if you elect to go this route you muct have all your shareholders file a 2553 within 2 1/2 months (15th day of the third month of your tax year) of your election.

The same protections that cover a C corp cover a S corp so if Kent had set up his fraudulent TVP business as a S corp instead of as a C corp I would still only be out my $21.50 when he got sued $10 million for feeding vegetarians a byproduct of a byproduct made from animal byproducts.

Sole Proprietorship

• Ownership - One single owner… you.
• Liability of Owners - Unlimited personal liability for you.
• Main docs needed:
  • DBA filing
  • Tax info - The company is not taxed because the profits and losses pass through to the owner.
  • Management - You
  • Capital - You contribute what ever is needed (do You sense a You theme here You with this one? You)

  You are responsible for absolutely everything in a Sole Proprietorship, so remember that when you set it up. There is no difference between you and the company. When you setup your company you’ll fill out a fictitious name certificate which will be your DBA. DBA stand for Doing Business As.

  This means if Ryan wants to start a business cleaning up horse poop after a parade and he sets it up as a sole proprietorship he will be Ryan Roylance DBA The Equine Pooper Scooper. Any thing the business owns he owns, anything the business does he does, any one the business owes money to he owes money to, and so on.

  If you’re making a company just to sell it later this is the hardest entity to sell because it’s so tied up in you, so chose something else.

  There is a thing called an LLP, a Limited Liability Partnership, that is available in only a few states. It brings many of the protection factors of an LLC to a partnership. It’s tricky and I’m not going to explain it because if you are setting one up then you are most likely a lawyer or some other profession like that and don’t need anything I would say here.

  Epilogue

  
  Wow that was a long blog post. I feel like I need to have some rolling credits at this point.

  So how did we decide on an LLC? We liked the structure of it and so looked around at similar companies to see what they were and they were also LLCs so I went down to the Salt Lake City Chamber of Commerce, registered the name, filed the articles of incorporation and we’ve been paying for the tax filing ever since!

  Thank You for Reading,
  Josh “Shua” Peters

  Disclaimer: The information contained here is what I have discovered and what we have done. Things are different from state to state so always consult your local chamber of commerce or a local small business lawyer before sallying forth with any of the info contained in this or any other blog post.

  Photo by PetroleumJelliffe

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  Tags: advice, business, corporation, guide, llc

  This entry was posted on Saturday, December 20th, 2008 at 10:37 pm and is filed under Home. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.