Category: Small Business

This is Part 4 in a series on types of business entities, and concerns partnerships. Previous installments involved the limited liability company, or LLC, the S-corporation, and C-corporation.

Although partnerships enjoy relatively flexible management attributes, partnerships lack the broad limitations of liability featured in limited liability companies and corporations. For this reason, the relative popularity of partnerships has waned over time.

There are several types of partnerships, including general partnerships, limited partnerships, and limited liability partnerships.

A general partnership is formed when two or more persons or businesses associate to operate a business for profit. General partners have fiduciary duties of loyalty and care to one another. Usually, the partnership is governed by a partnership agreement, which is a private contract between the partners about how the entity will be governed. Management is not centralized, but rather by the majority vote of partners, unless otherwise provided in the partnership agreement. In general partnerships, the liabilities of the partnership flow through to the partners.

The limited partnership is similar to the general partnership, except that there will be one or more limited partners who contribute cash, property or services to the partnership. Limited partners do not participate in the management of the partnership, however. Liabilities of the partnership still flow through to the general partner, but the limited partners generally are at risk only to the extent of their investment in or contribution to the partnership.

A partnership may choose to register as a limited liability partnership. In this form, the partners remain liable for their own actions – but not those of the other partners. Also, a limited liability partner may participate in the management of the partnership without losing its limited liability status.

Partnerships can be useful in joint ventures for a specified period of time, or until a certain objective is reached – particularly among business entities such as corporations or LLCs, which have liability protections built in to their organizational structure. In these cases, partnerships can provide a business stricture that is relatively easy to set up and cost-effective to administer.

This is Part 3 in a series on types of entities available when forming a business, and concerns C-corporations. Previous parts involved the limited liability company (LLC) and the S-corporation.

C-corporations are created by filing Articles of Organization with the Secretary of State. Management is by a Board of Directors and governed by the corporate bylaws. Annual shareholder meetings are required. Although the filing fees for a corporation are comparatively less than for other types of entities, the overall administrative burden can be greater. Therefore, on balance, C-corporations can be less flexible, and sometimes more costly, to manage than other types of entities.

Like the LLC and S-corporation, the owners of a C-corporation enjoy limited liability. Therefore, only their contributions into the corporation are at risk of loss (with some exceptions when the corporate veil is pierced). This can potentially include falling share prices as well as the depletion of capital contributions.

While the LLC and the S-corporation feature pass-through tax treatment, C-corporations have two layers of tax exposure, first at the corporate level and secondly on distributions to shareholders.

With C-corporations, multiple classes of stock are permitted, which allows for differing voting rights and preferential distributions. Also, its shareholders are not restricted by number, or to United States citizens and residents. These attributes can make the C-corporation an appealing type of entity when investment capital will be sought, or when numerous investors are anticipated.

This is the second part in a series on which type of entity to choose when forming a business. The first part concerned the limited liability company, or LLC.

S-corporations are another popular choice, particularly for small businesses with limited shareholders. S-corporations are created by filing Articles of Organization with the Secretary of State, and by timely electing S-corporation status on Form 2553 filed with the IRS.

The effect of the election is to generally elect pass-through tax treatment. All shareholders must consent to the election.

Like the LLC, the owners of an S-corporation enjoy limited liability, so only their contributions into the S-corporation are at risk of loss (except when the corporate veil is pierced).

The governance of the S-corporation is less flexible than the LLC, however. Management is by a Board of Directors, and annual shareholder meetings are required. Only one class of stock is allowed, and the number of owners is limited to 100 United States citizens and residents.

In some cases, a more favorable tax treatment is available at higher levels of earnings compared to the self-employment tax imposed upon the LLC form.

S-corporations may be appropriate when only one class of stock is needed, the company can generate adequate cash flow, and there is no apparent need to raise investor capital.

S-corporations are not an appropriate choice for companies anticipating more than 100 shareholders, any non-U.S. shareholders, the need for more than one class of stock, or an intent to raise investor capital.

Clients getting ready to form a new business entity often seek guidance on the type of entity that is suitable for them.  One popular choice is the limited liability company, or LLC.

An LLC essentially offers the limited liability characteristics of a corporation with the flexible governance of a partnership.

LLCs are often a good choice for the individual or small group of individuals looking for the limited liability characteristic, while preserving a higher level of flexibility in management, and avoiding the simplifying some of the administrative burden of other business forms.

Limited liability generally means that creditors of the LLC can pursue recovery from the assets of the LLC itself, but not from the personal assets of its members.  Put another way, a member’s assets generally are at risk only to the extent of his or her investment in the LLC.

Simplicity is another advantage of the LLC.  Corporations frequently require a more burdensome level of recordkeeping and administration.  Governance of an LLC, whether by all of the members or certain designated managers, looks to the provisions of the operating agreement.  The owners of an LLC, therefore, can reach agreement as to the procedures by which an LLC will be governed.   With Limited Liability Companies, distributions and tax liabilities flow through to the members.

While there are many benefits to the LLC, they do carry somewhat higher filing and annual fees in Illinois.  However, the value of the flexibility that LLCs can provide may make up for the higher level of costs.

There may come a time when it is impossible for the owners of a business to carry it forward.  But what should be done with the entity you have spent years building?

One outcome is to sell the business.  The owners will have to determine a value and be prepared to support it to a potential buyer.  In some cases, one or more current owners may buy the departing owner’s stake and continue the business; in others there is an outright sale of the stock or the assets to a new party.

If a sale is not going to occur, and the business is not going to continue but has a positive value, then a dissolution and winding up of the business becomes more likely.

When proceeding with a voluntary dissolution, the owners should execute an agreement that addresses, at a minimum:
– what happens with any remaining assets;
– what the liabilities are and how they are going to be addressed; and
– distribution of the proceeds.

Articles of Dissolution then should be filed with the Secretary of State to terminate the existence of the business.  Filing the Articles of Dissolution requires the owners to certify an absence of liabilities.

If Articles of Dissolution are not filed and the annual fees remain unpaid, the Secretary of State will involuntarily dissolve the company.  Involuntary dissolution will increase the statute of limitations for claims against the business, and may compromise the limited liability attributes of the company should any claims arise.

A business entity reflects years of effort, and preparing to close it down can be a monumental decision.  But if that is on the horizon, consider how best to maximize the return on what was built.

The incorporation or organization of a new business often invites the question, “What’s next?” Here are some things to identify in the first couple days which, if done properly, can increase the chance of success of the business.

1. Know the Why.

The Why is the motivating purpose for the founder or founders: Why get up in the morning? It is a reason to put time and energy into the business, even during sub-optimal conditions. It is a reward that comes with success. The Why may draw on the mission of the business, although it typically is not identical to it. It may be a single thing, or multi-faceted. Knowing what it is helps promote focus and motivation.

2. Plan for Growth.

Most businesses seek to grow and expand. But how is that going to be accomplished? By taking on new stakeholders? Attracting investment? Offering incentives? Each of these courses of action can have implications for the business. Before commencing one or more of them, consider how the organization and control of the company might change. There are numerous choices when structuring a company. It would be a disaster to unwittingly move from total control to a minority share—but sometimes it is possible. Proper planning and documentation can avert such problems.

3. Have Detailed Procedures.

Although this seems self-evident, it is important to take time to annotate the processes and procedures of the business. Doing so promotes efficiency and accuracy for repeated activities. It also creates a library for how to tackle tasks that do not come up frequently. By preserving the process, you will not have to research it again later. Finally, it allows someone to step in and assist more readily.

4. Anticipate Taxes.

Every business entity should anticipate having to pay taxes. Which apply – Payroll? Sales? Estimated? Something else? Identifying and budgeting for the relevant taxes and the payment schedules can help avoid the periodic financial crises as well as a lot of stress. Also, small businesses seeking to be taxed as an S-corporation have approximately two and one-half months from formation to make that election. Entities intending to make the election need to keep track of that deadline, or wait until the next tax year.

Getting the business formed is exciting, but laying the foundation for success is really critical.   Be sure to allocate time in the first few days to these fundamentals, so that they do not get lost among matters that seem to present more immediate deadlines.

Are you forming a business? Choosing a suitable structure from the outset can avoid problems later when you are getting ready for growth. One of the more popular choices is the Limited Liability Company. Here are four reasons why.

1.    Flexibility
LLCs are one of the more flexible types of business entities. Governance functions can be allocated among all of the members jointly, or limited to a certain number of managers. The operating agreement can delegate authority for various actions and events that the Company may encounter. Unlike with corporations, boards of directors and periodic meetings are not necessarily required. This means less administration and more time to actually run the business.

2.    Limited Liability
One of the compelling reasons to form an entity is to protect your personal assets from risks associated with your business activities. The LLC format, when properly maintained and operated, provides such protection, so the liabilities of the business that accrue through operations do not transfer to the owners of the business.

3.    Taxed as a Partnership or Individual
As a default, LLCs with multiple members are taxed as a partnership, and those with one member are disregarded and taxed to the individual. Thus, an LLC is a way to enjoy limited liability similar to a corporation, without the double-taxation of income to the corporation and to the shareholder. But if S-corp. tax treatment is or becomes appropriate, the LLC can generally make such an election by filing the relevant tax form in the beginning weeks of the Company, or for subsequent years.

4.    Series
Depending on the nature of the business, Series can be a useful way to partition liability. A Series LLC allows for the designation of subsidiaries under a common company. Each such Series is intended to create a separation of the assets and liabilities within it compared to any other series or the Company itself. This can be a useful way to administer a portfolio of different assets that each produce face their own unique risks and produce their own income. For example, some real estate investors like to hold each property in a separate series, rather than to pool multiple properties (and their respective risks) into one standard LLC.

Despite the advantages, LLCs are not right for every situation. We invite you to call us if you are preparing to form a new business venture. We can consult with you as to the best type of entity, as well as to assist you with the steps that follow the filing of the organizing documents.

Moving to a new commercial space?  Here are some thoughts to keep the process as smooth as possible.

The search for a new office, retail, or industrial space is an important process, both to ensure that the subsequent space is in an advantageous location and is the appropriate size.  What is the reason for the move?  Are there any goals you are trying to accomplish, or any particular requirements that the new space must satisfy?  Is the new building maintained properly?  Is the relationship with the prospective landlord a positive one?

Signing a lease typically is a decision that will impact the business for several years, so the choice should be made thoughtfully.  It may be worthwhile to work with a broker who is familiar with the buildings and the market trends.  He can help the business determine the most important factors that need to be present in the new space, identify buildings that best fit the criteria, and be a point of contact with prospective landlords during the search phase.

Not every business is appropriate for every location.  Before signing a lease, make sure that the use, occupancy, and any non-compete restrictions will not impede the intended type of business or practice.

Research the moving company to make sure it is reputable and without a lot of complaints.  Also, if you have equipment leases or servicing agreements, find out whether the equipment can be moved with the general furnishings and office items, or whether separate arrangements are required.

Some larger buildings within the City of Chicago have specific times, fees and rules that govern moving in or out.  Also, proof of insurance coverage may be required before the move.  Be sure to find out what they are in advance, so that you can coordinate the timing and other requirements with the movers, make any necessary reservations, and obtain coverage as needed.

Finally, make a list of the services used at the business before the move.  Provide each with updated contact and billing information to ensure a smooth transition to the new location.  Also, be sure to arrange any internet, telephone, technology and utility services, and update contact and marketing materials in advance, so that they will be ready to go in the new location.

Five Considerations for the Multi-State Firm
Some people living outside of Illinois have been drawn to the market potential of the Chicago area after starting a business in their home state.  The potential entrant should be aware of a few considerations.

1.  New entity, or multi-state entity?

Assuming a substantial presence or interaction in Illinois, transacting business in a new state suggests the question of whether to do so under the existing entity, or whether to form a new affiliated entity in Illinois.  Some potential advantages to starting a new entity include having a natural partition for liability purposes, and a separateness of records for employment, tax and accounting purposes.  However, this may result in higher costs for insurance and the operations of two businesses rather than one.  Business can also be done by the out-of-state company, but it must register with the Illinois Secretary of State and receive authority to transact business in Illinois.

2.  Taxes

Entities transacting business in multiple states may incur tax liability to Illinois, as well as the counties and municipalities in which it operates.  These may include, at a minimum, income and sales taxes.  They also may target unemployment, if the firm maintains staff in Illinois, licensing costs, and other particular goods or services.

3.  Licenses and bonds

Professionals practicing in many types of industries and occupations must be licensed to practice in Illinois, and some must obtain a bond.  At present, these types of registrations typically do not transfer from other states.  Where there is reciprocity, the professional may need to register with the appropriate governing body in Illinois before practicing in this jurisdiction.

4.  Registered agent

Whether acting as an out-of-state entity authorized to transact business in Illinois, or whether forming an Illinois entity, the firm will be required to have a registered agent in Illinois.  A registered agent is an Illinois person who receives service of process and communications from the Secretary of State on behalf of the entity.

5.  Welcome to Illinois

Selling goods and services in Illinois, and otherwise transacting business, can and usually does subject a firm to the laws of Illinois.  Give us a call for assistance in navigating through your Illinois legal obligations.  We want your entrance to Illinois to be as seamless as possible.