Owning a successful business requires hard work. Business owners who engage in proper business planning are not only smart, but more likely to retain their success even in the face of difficult times.
The following outlines two different types of business organizations and the functions of each:
Limited Liability Companies (LLC's):
Limited Liability Companies (LLC’s) are a popular, inexpensive, and flexible way to reap similar benefits offered by corporations. Like a corporation, which limits the liability of equity owners, LLC’s limit liability of the company members. Similarly, LLC’s offer similar tax benefits as a corporation (e.g. pass business loss to individual owners). However, unlike a corporation, an LLC has a more centralized management by its managers and/or members.
LLC’s are quickly created with a Certificate of Organization which is recorded with the Secretary of State; Operating Agreement; Organizational Minutes, and Unit Certificates.
Like LLC’s, corporations are considered a separate legal entity from its owner(s). A significant benefit of having a corporation is for the limited liability of its owners.
Corporations are comprised of shareholders (stockholders), a board of directors, and corporate officers (e.g. President, Vice President, Secretary and Treasurer).
A corporation may own property, enter into contracts, sell property, sue and be sued. Just as a person is responsible for their own debt, a corporation is responsible for its own acts and debt as a separate legal entity.
There are four different types of corporations:
- Business corporations: Structured as a profitable corporation.
- Nonprofit corporations: Not for profit, organized primarily for charitable, educational, religious, or scientific purposes.
- Public corporations: Structured for governmental purposes.
- Professional corporations: Structured for professionals or group of professionals, such as attorneys or doctors.
A corporation may also be an “S” corp. or “C” corp. By far, the most popular is the “S” corp., where shareholders retain limited liability and tax benefits. However, an “S” corporation is limited to 75 shareholders and one type of stock.
A buy-sell agreement is a legally binding agreement between co-owners of a business which specifies the company value and what happens when a co-owner dies, becomes disabled, or voluntarily or involuntarily leaves the business. In essence, a buy-sell agreement is similar to a premarital agreement between future spouses, and is sometimes referred to as a “business will.”
Business Succession Planning:
Planning and timing are key when selling or transferring a business. Proper planning is essential to ensure a business is successfully sold or passed on to successive business owners or family members.