The LLC is a relatively new form of business entity offered by most US jurisdictions that aims to provide the separate entity and limited liability benefits of a corporation while preserving the pass-through tax benefits of a partnership or sole proprietorship. In addition, it offers more flexibility in management than a corporation does.
Corporations generally are understood to be for-profit, and the board of directors and the officers of the corporation are required by law to manage the corporation in the financial interests of the shareholders. In a sense, the financial interests of the shareholders are supreme to any other consideration that the management of the corporation takes into account. For most enterprises this makes sense, but in certain cases corporations are organized to serve interests other than the financial interests of the shareholders. In these cases, an enterprise might consider forming a non-profit, benefit, or flexible purpose corporation.
In kicking off my series on different business entity structures, I’ll start with corporations.
A corporation is a limited liability entity that exists separately from its legal owners. One or more owners hold shares of stock in the corporation that grants them certain economic rights to the profits and residual assets of any business operated by the corporation, as well as certain voting rights as to the management of the corporation. The corporation is able to enter into its own contracts and legal relationships with other parties, which is part of what protects the shareholders from liability. Except as described below in regards to an “S” corporation, a corporation is taxed separately and in addition to its owners, meaning that when a corporation earns a profit that amount is taxed by certain states and by the federal government. In addition, once the corporation takes those profits and distributes them to shareholders as dividends, the shareholders will also be taxed on that income (which is often colloquially referred to as “double taxation”).
I’ve been covering the steps involved in the Business Formation process. To recap, the steps are:
My last post covered the Planning, Entity Selection and Filing steps, which takes us to the point where the state has returned stamped documents establishing a new entity. Now we are at a complex stage: establishing how the business will be managed, initial capitalization, and what the rights of all stakeholders will be going forward.
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