- Why do I need a lawyer when starting a new company?
If youre like most other entrepreneurs, youre undoubtedly highly
motivated and convinced that youll be able to manage all aspects
of your new business masterfully and by yourself. Despite your
high level of self-confidence, however, you must realize that
the complexities of todays business environment call for reliance
on the assistance of specialists. The services of a lawyer are
valuable at the very beginning, in assisting you with all the
legal aspects of starting an enterprise: setting up the legal
form of the business, negotiating leases and contracts, securing
the necessary licenses and permits, preparing partnership or stockholder
agreements, and so forth. You dont need to be aware of a large
number of business laws to start a business, but you do need to
be aware of some of the basics. You can face severe consequences
if you break certain laws regulating businesses. Subsequently,
your attorney will see to it that you become thoroughly familiar
with the details of pertinent legislative acts and local ordinances.
These run the gamut from the minimum wage and labor laws, through
health and safety regulations, to tax responsibilities. Youll
probably continue to call on your attorney during the life of
your business for assistance in a variety of situations too numerous
- Which form of business should I choose?
One of the decisions you must make early in the life of your firm
is the legal form of business. Sole proprietorships, partnerships,
partnerships, and corporations are the here primary forms of organization,
and there are several types of partnerships and corporations.
There is no one best form of organization; it depends on the company
and its owners situation. Nonetheless, one of the primary considerations
in selecting a business organization is shielding the entrepreneur
from liabilities incurred in running the venture. Other important
considerations include (a) the ability to transfer ownerships
rights to the firm, (b) the continuation of the business in the
event of death or withdrawal on one or more of the entrepreneurs,
(c) the initial and later money or capital needs of the proposed
business, and (d) tax implications which are significant on-going
The choice of legal form of organization depends on a variety
of factors, the most important typically being:
liability of the business owner(s);
tax considerations, distribution of profits and losses;
ability to raise capital;
expense and complexity of organizing the business;
amount of government regulation and reporting requirements;
- What is the best way to protect myself from business liability?
Most businesses with high-growth potential choose to incorporate
for one overriding reason limited liability. A shareholder in
a corporation is not liable for more than his investment in the
corporation. Creditors cannot seek individuals assets for repayment
of corporate liabilities. With proprietorships and partnerships,
owners are personally liable, except in the circumstances described
for limited liability partnerships and LLCs. In fact, general
partnerships make each owner liable for debts for the entire company
and may even extend to personal indebtedness beyond the business.
Be aware that incorporation primarily protects you from liability
suits. If your business is sued by customers, employees, or anyone
else, your personal assets are protected (they can also sue you
personally, however). Incorporation provides protection against
creditors seeking to claim your personal assets because of your
business debts; however, many lenders require a personal guarantee
to back up corporate loans. In that case, incorporation is not
providing protection against those creditors. Therefore, even
though incorporation legally protects owners from creditors and
liability suits, outside parties may skirt around that protections
through various means.
- What is a Limited Liability Company "LLC"?
A limited liability company ("LLC") is a new form of business
entity that combines the operational flexibility and tax status
of a general partnership with the limited liability protection
traditionally associated with limited partnerships and corporations.
An LLC has far greater operational flexibility than either a subchapter
C corporation, a subchapter S corporation or a limited partnership.
The principal characteristics of limited liability companies are:
The LLC is not required to hold any annual meetings or to comply
with the many operational restrictions imposed upon corporations.
The restrictions on the number and types of shareholders applicable
to a subchapter S corporation do not apply to the owners of an
LLC (the "members"). The members of an LLC may also participate
in management to a greater extent than limited partners.
An LLC differs from a general partnership inasmuch as its members
are not personally liable for the obligations of the LLC. It also
differs from a limited partnership in that no member is jointly
and severally liable for obligations of the LLC, unlike the general
partner in a limited partnership. An LLC is subject, however,
to disclosure, record keeping and reporting requirements that
do not apply to a general partnership.
An LLC is a business entity consisting of two or more "persons"
(meaning an individual, general partnership, limited partnership,
association, trust, estate or corporation), conducting business
for any lawful purpose. An LLC may be an incorporator, general
partner, limited partner, applicant of a DBA, or a manager or
any corporation, partnership, limited partnership or limited liability
LLCs consist of members, managers, and employees. Management
of the company is reserved to the members or managers as specified
in the Articles of Organization. Generally, neither members, managers
nor employees are personally liable for any debt or obligation
of the company.
LLCs are creatures of statue and become effective once having
filed approved Articles with the Division. Like most business
types filed with the Division, LLCs are formed by filing Articles
(called Articles of Organization). Foreign LLCs may transact
business in the state once having completed an Application for
Registration, LLCs may amend their articles, file Articles of
Dissolution, and must file an Annual Report.
Montana LLCs are treated as partnerships for tax purposes.
Partnership tax treatment is advantageous because the earnings
of a partnership are treated as the earnings of its partners.
No separate tax is imposed on the partnership entity. In contrast,
the earnings of a regular corporation are taxed at the entity
level; and dividends which are distributed to the shareholders
are also taxable to the shareholders. Thus, the distributed earnings
of a corporation are taxed twice, the earnings of a partnership
only once. Like a partnership, the earnings of the LLC are taxed
- Should I form an LLC or Corporation?
- Whats an "S" Corporation?
An "S" corporation is a special type of corporation which receives
special tax treatment. If a corporation qualifies for "S" status
from the Internal Revenue Service, it is taxed like a partnership
whereby corporate income "flows through" to shareholders and is
taxed at individual rates. While you pay the normal payroll taxes
(FICA, Social Security) on salaries to owners and others, profits
over and above reasonable salaries to the entrepreneur(s) can
be paid out as corporate dividends without payroll tax overhead.
This is important if the corporation prospers and earns more net
income than would normally be paid out in salaries. The corporation
itself is not taxed, thus avoiding double taxation. To be considered
an "S" corporation, a firm must:
not have more than 35 shareholders;
not have any non-individual shareholders (other than estates
not have a nonresident alien as a shareholder; and
not have more than one class of stock.
To set up your new company as an "S" corporation, you need to
incorporate as a regular corporation and abide by the guidelines
indicated above. You then make an election for "S" corporation
status with the IRS. This is done on IRS Form 2553. A consent
is required of each shareholder on this form, acknowledged with
Montana tax laws provide the same tax treatment for "S" corporations.
To qualify for "S" status, IRS Form 2553 must be submitted to
the IRS and Montana Department of Commerce.
- If I choose to form a corporation, should I select S or C tax
- If I want to raise money for my corporation or LLC from investors
in the form of debt of equity, what do I need to think about?