Law
Office of Marc D. Machtinger, Ltd.
|
Initial
Considerations & Choice of Business Entity |
|
|
E-Start
Your Businesssm
|
Initial Considerations And Choice of Business Entity
Initial
Considerations
The 7 Entities
Liability
Insurance
Tax Matters
Ten Tips
Intellectual Property Matters
IP
Attorney
Patents/Inventions Trademarks/Names
Copyrights
Trade Secrets
Trade Dress
Our Services
E-Start Your Businesssm
Top of Page
What are the pros and cons of the 7 most common types of business entities?
What
should I know about Liability issues?
Do I need Insurance?
What should I know about Tax Considerations,
and do I need an accountant?
What are 10 quick tips for start-up
businesses?
Pros and Cons of the 7 most common types of business entities:
The
most common forms of business entities include:
(1) Sole Proprietorships,
(2)
General Partnerships (GPs), (3)
Limited Partnerships (LPs),
(4) Limited Liability Partnerships
(LLPs), (5) Limited Liability
Companies (LLCs), (6)
C Corporations, and (7)
S Corporations.
The only entities which provide limited liability to owners (with respect to both tort and contract liability) are S Corporations, C Corporations, and Limited Liability Companies. Therefore, in the majority of cases, start-up businesses should consider one of these three entities.
Note that this liability shield is subject to various restrictions and caveats (see our liability section below). The decision between these three entities should predominantly be determined by tax considerations and management and control considerations.
The information provided on this page is general information and can vary from state to state. Legal counsel in your state should be consulted prior to deciding on a form of business entity.
If you are interested in forming an Illinois business entity, feel free to Contact Us, and consider using our E-Start Your Businesssm feature.
Initial
Considerations
The 7 Entities
Liability
Insurance
Tax Matters
Ten Tips
Intellectual Property Matters
IP
Attorney
Patents/Inventions Trademarks/Names
Copyrights
Trade Secrets
Trade Dress
Our Services
E-Start Your Businesssm
Top of Page
Initial
Considerations
The 7 Entities
Liability
Insurance
Tax Matters
Ten Tips
Intellectual Property Matters
IP
Attorney
Patents/Inventions Trademarks/Names
Copyrights
Trade Secrets
Trade Dress
Our Services
E-Start Your Businesssm
Top of Page
1. Sole Proprietorships: Sole Proprietorships are created by default without any formalities when a single individual conducts business. Personal assets are exposed to creditors when conducting business as a sole proprietor. Some of the risks associated with conducting business in this fashion can be managed with comprehensive insurance. Gains and losses are treated on the individual's personal income tax return. Some advantages of a Sole Proprietorship are the ease of creation and lack of formalities involved.
2. General Partnerships: General Partnerships ("GPs") are formed by default without any formalities when two or more individuals conduct business jointly. General partners are personally liable to business creditors, and should consider insurance to help manage the associated risks. Income and losses are reported directly on the individuals' tax returns. Although not required for formation, a partnership agreement should be considered.
3. Limited Partnerships: Limited Partnerships ("LPs") are formed by filing a certificate of limited partnership with the secretary of state. LPs consist of limited partners and general partners. Liability is limited for the limited partners, but not for the general partners. Limited partners can lose the benefits of limited liability if they actively participate in management. Tax treatment for LPs is the same as for GPs.
5. Limited Liability Companies: Limited Liability Companies ("LLCs") are formed by filing articles of organization with the secretary of state. An operating agreement is entered into by members of the LLC. LLCs offer limited liability to all members, and do not require the formalities of corporations. They also offer considerable flexibility with respect to control and management. Single member LLCs are now permitted in all 50 states and the District of Columbia. LLCs can elect to be treated as either partnerships or C corporations for tax purposes, however, they are not limited by the same restrictions by which S corporations are limited. LLCs may be more expensive to form than corporations, and may have higher state franchise taxes or renewal fees. LLCs cannot be used if publicly held investors are desired, and investments may not be readily liquid.
6. C Corporations: Corporations, whether C corporations or S corporations, are formed by filing articles of incorporation with the secretary of state. The owners are called shareholders, and are issued shares of stock. The shareholders elect a board of directors, which in turn elects officers to carry out the day to day business of the corporation. When only a single owner or small number of owners create a corporation, the same individual or individuals can serve as shareholders, directors, and officers. Various formalities must be attended to in order to properly create and maintain the corporation. Both C corporations and S corporations provide limited liability to shareholders. Shareholders agreements can be used to govern transfers of ownership and deadlocks. C corporations are subject to corporate taxes, and thus, income which is not distributed as wages may be subject to "double taxation." C corporations may offer several tax advantages, however, with respect to deductibility of retirement contributions, group insurance premiums, and other benefits.
7. S Corporations: S Corporations are formed in the same manner that C corporations are formed, and provide the same limited liability to shareholders. The main difference between the two corporate forms is that S corporations are "flow through" entities, that is, income is taxed at the individual level rather than at the corporate level. S corporations are often a good choice for start-ups due to the limited liability, flow through tax treatment, and possible payroll tax advantages offered by them. S corporations are subject to several restrictions including the provisions that there be no more than 75 shareholders, other corporations cannot serve as shareholders, foreign citizens cannot be shareholders, and only one class of stock may be issued. If these restrictions do not interfere with business plans, an S corporation is often a good starting point for a start-up business.
Initial
Considerations
The 7 Entities
Liability
Insurance
Tax Matters
Ten Tips
Intellectual Property Matters
IP
Attorney
Patents/Inventions Trademarks/Names
Copyrights
Trade Secrets
Trade Dress
Our Services
E-Start Your Businesssm
Top of Page
What
should I know about Liability issues? Liability is perhaps
the most important factor to consider when starting a business. It should
be understood that conducting any business will involve some risks. In
view of potential liability to creditors or litigation claimants, it is
prudent in most cases to select a business entity which shields the owners
from personal liability beyond their investments. For the majority of
start-up businesses, a corporation or limited liability company ("LLC")
will be the entity of choice. However, it is important to understand the
limitations of the protection offered by these entities.
First,
shareholders of companies and members of LLCs are shielded from personal
liability to creditors or claimants of the business only if proper formalities
are followed (such as annual meetings of shareholders, annual meetings
of directors, keeping of minutes, filing of annual reports, issuance of
stock certificates, etc.). Furthermore, the business must be properly
capitalized, business and personal funds must not be commingled, and business
funds should not be treated as personal funds and should be kept in accounts
registered under the business name. The formal business name should always be used in conducting business and entering contracts, and any assumed names should be properly filed and recorded. Fraud or misrepresentation will eliminate
this liability shield as well.
Second, this shield does not necessarily
protect directors, officers, managers, or employees from personal liability.
It may be prudent to include provisions in the by-laws of a corporation
for indemnity of directors, officers, and employees above and beyond the
mandatory state requirements in order to protect individuals acting in
those capacities. Insurance is a necessity in order
to protect active members of a business. When leasing real estate or obtaining
a loan, a personal guarantee is often required, which effectively eliminates
the liability shield with respect to that transaction. Professionals who
provide services for which a license is required should be aware that
the protection offered by these entities does not apply to professional
liability in conjunction with providing such services. Professional liability
insurance is a must in such cases. Advice of counsel should be sought
when forming a business entity in order to minimize one's exposure to
potential liability.
Initial
Considerations
The
7 Business Entities
Ten
Tips
top
of page
Insurance
Initial
Considerations
The 7 Entities
Liability
Insurance
Tax Matters
Ten Tips
Intellectual Property Matters
IP
Attorney
Patents/Inventions Trademarks/Names
Copyrights
Trade Secrets
Trade Dress
Our Services
E-Start Your Businesssm
Top of Page
Do I need Insurance? In view of the limitations of the liability shield offered by corporations or limited liability companies, various types of insurance should be seriously considered and secured prior to commencement of business activities in order to further protect individuals and businesses. Policy requirements and details should be reviewed carefully. An insurance professional should be contacted to determine what types of insurance policies are appropriate. At least the following types of coverage should be considered: comprehensive general liability, product liability, directors' and officers' insurance, office or location contents, automobile, computer and equipment, employee dishonesty, health, professional liability, worker's compensation, fidelity bond, intellectual property infringement/enforcement, umbrella, and any other appropriate coverage.
Tax Considerations
Initial
Considerations
The 7 Entities
Liability
Insurance
Tax Matters
Ten Tips
Intellectual Property Matters
IP
Attorney
Patents/Inventions Trademarks/Names
Copyrights
Trade Secrets
Trade Dress
Our Services
E-Start Your Businesssm
Top of Page
What should I know about Tax Considerations, and do I need an accountant? In general, there are two basic ways in which business entities are treated for tax purposes. For certain entities, such as sole proprietorships, partnerships (GPs, LPs, and LLPs), and S corporations, income is reported on the tax returns of the individual owners, and taxed at their respective rates. These entities are known as "flow through" entities. C corporations are treated as separate entities for tax purposes, and income which is not distributed as wages may be taxed at both the corporate level and the individual level (if distributed as dividends). C corporations have several tax advantages, however, including greater deductibility of certain expenses related to retirement plans, group insurance, and other benefits. Limited liability companies have the option of flow through or corporation tax treatment. The differences in tax treatment between the various entities are complex, and there may not be any way to predict with certainty which entity will optimize the tax treatment of a start-up business. A tax professional should be consulted prior to selecting a business entity, and advice regarding bookkeeping and tax filing requirements should be sought at the onset of any business endeavor.
10 quick tips for start-up businesses:
Initial
Considerations
The 7 Entities
Liability
Insurance
Tax Matters
Ten Tips
Intellectual Property Matters
IP
Attorney
Patents/Inventions Trademarks/Names
Copyrights
Trade Secrets
Trade Dress
Our Services
E-Start Your Businesssm
Top of Page
Initial
Considerations
The 7 Entities
Liability
Insurance
Tax Matters
Ten Tips
Intellectual Property Matters
IP
Attorney
Patents/Inventions Trademarks/Names
Copyrights
Trade Secrets
Trade Dress
Our Services
E-Start Your Businesssm
Top of Page
Initial
Considerations
The 7 Entities
Liability
Insurance
Tax Matters
Ten Tips
Intellectual Property Matters
IP
Attorney
Patents/Inventions Trademarks/Names
Copyrights
Trade Secrets
Trade Dress
Our Services
E-Start Your Businesssm
Top of Page
What are 10 quick tips for start-up businesses?:
1. Develop a Business Plan: Take steps to insure that the product or service you intend to offer will be marketable, and that your costs and projected sales will create a profit. Determine whether you will need to find investors or obtain loans. Be prepared for a lengthy period without significant revenue, as most start-up businesses take a minimum of six months to generate income. Investigate whether zoning ordinances or government regulations in the particular industry are applicable. Develop a marketing plan. Secure estimates and be sure that you are aware of everything that will be involved. Use confidentiality agreements with third parties whenever disclosing sensitive information or information related to an invention.
2. Investigate initial Intellectual Property matters: Have a professional clearance search performed with respect to the intended business name and brand names. Register domain names and investigate whether any steps should be taken to protect existing and developing intellectual property, including trademarks, trade secrets, inventions, and copyrightable material. Investigate whether any infringement matters should be explored. Honor any previous valid non-compete and confidentiality agreements. If a business is being purchased, have a due diligence investigation conducted, including intellectual property due diligence.
3. Select a business entity: Discuss liability and other matters with an attorney. Seek tax advice from a tax professional to assist in selecting the proper entity. Most start-up businesses will choose either an S corporation or a limited liability company after considering liability and tax matters, however, a C corporation should not be ruled out in view of several tax issues. Any of these three entities can be used by a single owner or by multiple owners.
4. Work with an attorney to form the business entity: As the proper formation and maintenance of a business entity is important in order to receive the benefits of it, it is well worth the expense to work with an attorney from the beginning. Pre-formation and liability matters should be fully explored. If you are forming a corporation or limited liability company in Illinois, consider using our E-Start Your Businesssm online feature to save in legal fees by efficiently transmitting your information to us online, or Contact Us to request traditional services.
5. Work with an accountant: Consult a tax professional to explore tax considerations prior to selecting a business entity. Work with an accountant in order to meet proper tax filing requirements and establish appropriate bookkeeping procedures.
6. Enter into a shareholders' agreement: If you decide to form an S corporation or a C corporation, and two or more owners will be involved, have your attorney prepare a shareholders' agreement which addresses your needs related to transfer of interest in the corporation and voting deadlocks.
7. Obtain appropriate insurance prior to conducting business: There are always risks and potential liabilities involved in any business endeavor. The limited liability offered by corporations and limited liability companies does not protect participants in all situations, and is susceptible to failure. Speak with an insurance professional and obtain appropriate coverage. Pay close attention to the details and requirements of any policies obtained.
8. Have your attorney prepare an Employment Agreement: If your business plans include hiring employees, an employment agreement which spells out the details of the business relationship and makes the terms of employment clear should be used. Such an agreement should include provisions for the assignment of any intellectual property created during the course of employment, a confidentiality agreement for sensitive information and trade secrets, and an enforceable non-compete clause. Competent legal advice should be obtained in order to include clauses of these sorts which will be held valid and enforceable in a court of law.
9. Be sure to maintain required formalities: Corporate formalities such as issuing stock, annual meetings, keeping minutes, filing annual reports, and filing renewal fees must be attended to in order to maintain the benefits of the entity. The convenience and security of asking your attorney to assist with these annual matters is well worth the minimal expense involved.
10. Revisit Intellectual Property matters frequently: Seek continuous advice on protecting trademarks, inventions, trade secrets, and copyrightable works. Seek legal counsel to reevaluate infringement matters with respect to new marks, improvements in products or processes, or other changes in intangible assets. Reevaluate intellectual property strategies as your business expands and changes.
upImportant Intellectual Property Considerations:
Intellectual Property counsel should be consulted as early as possible to protect and optimize business interests.
Why Work With an Intellectual Property Attorney in forming an Illinois Business Entity?
What
should I know about patents?
What should I know about Trademarks,
Trade Names, and Domain Names?
What should I know about Copyrights?
What should I know about Trade Secrets?
What should I know about Trade Dress?
Initial
Considerations
The 7 Entities
Liability
Insurance
Tax Matters
Ten Tips
Intellectual Property Matters
IP
Attorney
Patents/Inventions Trademarks/Names
Copyrights
Trade Secrets
Trade Dress
Our Services
E-Start Your Businesssm
Top of Page
Initial
Considerations
The 7 Entities
Liability
Insurance
Tax Matters
Ten Tips
Intellectual Property Matters
IP
Attorney
Patents/Inventions Trademarks/Names
Copyrights
Trade Secrets
Trade Dress
Our Services
E-Start Your Businesssm
Top of Page
Why Work With an Intellectual Property Attorney in forming an Illinois Business Entity? Protection of Intellectual Property is vital in today's business environment. Intangible assets are increasingly becoming the most valuable assets of businesses, and businesses rise and fall based on management of their Intellectual Property assets. It is highly advantageous to investigate Intellectual Property issues from the beginning of a business endeavor. We include a free initial Intellectual Property consultation with your business formation package. We will advise you regarding Intellectual Property issues such as clearance searches and protection with respect to trade name and trademarks, protection of inventions via design and utility patents, infringement risks, copyright matters, procedures for protecting trade secrets, etc.
What should I know about patents? Any business which relies on innovative products or processes should investigate whether patent protection can be obtained.
Patents provide exclusive rights to the owners, and can provide a tremendous amount of power, competitive advantage, and value to a business. Patent rights can be held, licensed, sold, used to attract investors, or used to enhance value when a business is sold. Patents provide the exclusive right to make, use, sell, offer to sell, and import an invention. Any product, machine, process, composition of matter, or improvement thereon, which is new, useful, and unobvious, is potentially patentable.
As timing, confidentiality, and diligence can affect options for patent protection, intellectual property counsel should be consulted as early as possible. Whether or not patent protection can be obtained, a clearance search and analysis should be conducted to determine whether the patent rights of others may be infringed by the activities of a business.
If a business is being purchased or sold, Intellectual Property counsel should be obtained in order to conduct a due diligence investigation from an Intellectual Property perspective, or to enhance value of Intellectual Property. Visit our Patents page on this web site for further information, and consider our innovative E-Patent Your Inventionsm feature.
What should I know about Trademarks, Trade Names, and Domain Names? Trademark matters should be considered at the onset of any new business. The acceptance by the Secretary of State of a business name is not an indication of whether the use of the name might be an infringement of the rights of others. Before a trade name is selected, a professional clearance search and analysis should be conducted to determine whether any trademark rights of others might be infringed. Selection of trademarks and service marks should be discussed with Intellectual Property counsel.
In the current business environment, every business should plan on having a presence on the World Wide Web. Whether for immediate use or future use, the availability of a domain name derived from a business's trade name or trademarks should be checked, particularly with the ".com" suffix. A clearance search on the domain name should be performed to investigate trademark matters, and registration of the domain name should be obtained as early as possible. Visit our Trademarks page and our Domain Names page on this web site for further information, and consider our E-Register Your Marksm feature.
What should I know about Copyrights? Copyright matters should be considered for artistic and literary creations used in a business. Any distributed materials should include a copyright notice. Federal copyright registration should be considered for materials of importance to the business. Care should be taken to avoid infringement of the copyrights of others. Visit our Copyrights page on this web site, and consider our E-Copyright Your Worksm feature.
What should I know about Trade Secrets? Many aspects of a business, if properly handled, can be protected as Trade Secrets. Intellectual Property counsel should be consulted in order to identify and implement proper procedures to protect and maintain Trade Secrets. Customer lists, price lists, programs, manufacturing processes, chemical formulas, recipes, and other information which is maintained in secrecy and provides an economic advantage over competitors should be suitably protected.
In general, confidential documents should be labeled, access to sensitive information should be restricted, background checks should be conducted on employees, security measures should be taken, and employment agreements should be used and should include proper confidentiality and non-compete clauses. Also, employees should be advised to abide by previous confidentiality agreements they have entered into with previous employers. Visit our Trade Secrets page on this web site for further information.
What should I know about Trade Dress? Trade dress refers to the look, feel, and shape of a business's packaging, product configuration, or other customer contact. Packaging should be unique and distinctive and kept consistent in order to build customer recognition. Care should be taken not to duplicate the look, feel, and shape of competitors' packaging or products.
upOur Services :
Initial
Considerations
The 7 Entities
Liability
Insurance
Tax Matters
Ten Tips
Intellectual Property Matters
IP
Attorney
Patents/Inventions Trademarks/Names
Copyrights
Trade Secrets
Trade Dress
E-Start Your Businesssm
Top of Page
Mr. Machtinger is an experienced Intellectual Property Attorney, providing the following professional business law services with an emphasis on intellectual property matters:
|
|
For further information, Contact Us
Home
| Special
Online Features | Charge
Your Payment |
Legal Notices | About
Marc D. Machtinger | Contact
Us
