FAQ

1. Why do I need a lawyer when starting a new company?
   If you’re like most other entrepreneurs, you’re undoubtedly highly motivated and convinced that you’ll 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 today’s 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 don’t 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. You’ll probably continue to call on your attorney during the life of your business for assistance in a variety of situations too numerous to mention.
   
2. 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 concerns.
   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;
   • management control.
   
   
3. 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 LLC’s. 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.
   
   
4. 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 company.
   • LLC’s 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.
   • LLC’s are creatures of statue and become effective once having filed approved Articles with the Division. Like most business types filed with the Division, LLC’s are formed by filing Articles (called Articles of Organization). Foreign LLC’s may transact business in the state once having completed an Application for Registration, LLC’s may amend their articles, file Articles of Dissolution, and must file an Annual Report.
   • Montana LLC’s 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 only once.
   
   
5. Should I form an LLC or Corporation?
   
   
   
6. What’s 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 & trusts);
   • 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 their signature(s).
   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.
   
   
7. If I choose to form a corporation, should I select S or C tax status?
   
   
   
8. 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?