What form should
your business take?
A proprietorship, a partnership, a limited
liability company (LLC), and a corporation are
all possibilities. We discuss these options with
you, often consulting with your accountant,
and help you to choose the form of business
that accomplishes your goals with the least
amount of complication.
A proprietorship is as simple as hanging out your shingle: you are the sole owner. You
claim the income and expenses of the business on schedule "C" of your personal income
tax return. A proprietorship does not file a separate tax return.
A partnership is a business arrangement that involves two or more partners. The
partnership files its own tax return. Profits or losses are passed through to the partners.
Most partners enter into a written partnership agreement that details:
A limited liability company (LLC) has the protection of limiting a member's liability. A
member purchases units of ownership of the LLC and the member's liability is limited to
the cost of the units. If you (or you and your spouse) set up a business as an LLC you
can choose to have the LLC taxed like a proprietorship for federal income tax purposes.
If you and others set up a business as an LLC, you can choose to have the LLC taxed like
a partnership or like a corporation, for federal income tax purposes. Articles of
organization are filed with the Secretary of State's office to form an LLC. An operating
agreement is then adopted which sets forth the internal rules governing administration
and operation of the LLC. When protection from lawsuits is a primary goal, an LLC or
corporation is the attorney's recommendation.
Selecting a corporation as a form of business provides limited liability. You and other
shareholders purchase shares of the corporation. The shareholder's liability is limited to
the cost of the shares. There are two common types of corporations, "S" corporations
and "C" corporations. An "S" corporation files its own tax return and any profit or loss is
passed through to its shareholders. A "C" corporation files its own tax return and pays tax
on its profits.
A corporation is formed by preparing and filing articles of incorporation and
accompanying documents. After formation, bylaws are adopted that govern the internal
administration and operation of the corporation. Directors are elected by the
shareholders. The president and other officers of the corporation are chosen by the
directors. Shareholders and directors have regularly scheduled meetings.
Restricting transfers of stock or ownership interests
A buy-sell agreement is used when an owner wants to have the right to buy out another
owner's interest in the business in the event of death, retirement, potential sale or
termination of employment. The occurrence of one of those events triggers the buy out.
The buy out price is established in the buy-sell agreement. Buy-sell agreements can be
written to deal with many situations. Each situation presents many optional solutions. The
business owners seek to agree on these solutions in advance, so there are no disputes
when the buy out is triggered.
Our office provides legal services in the formation of corporations, LLCs, partnerships,
proprietorships, and buy-sell agreements. Fees are available upon request.
Attorney at Law
Suite 204 1420 S. Atherton Street
State College, PA 16801
The Law Offices of Fredrick Farber
how much each partner invests in the business
what each partner does for the business
what each partner's percentage of ownership of the
what each partner takes out of the profits of the
what happens when the partnership ends
other matters which aid in the operation of the