The Key Benefits of Creating Your Own Business Entity

If you run a business as a sole proprietor under your own name, or a DBA, but have yet to legally form a business entity then you’ll want to be informed on the options available to you and their respective benefits. Forming a corporation or LLC requires some paperwork and minor fees but in most cases the effort and cost is small compared to the benefits.

The LLC

Most small business owners opt to form a Limited Liability Company (LLC) because of the flexibility and simplicity that this option affords. LLCs can be structured in nearly any way seen fit by the members and changes can be made with relatively little hassle as the company grows or evolves.

Perhaps the biggest benefit of creating an LLC, as opposed to a sole proprietorship or general partnership, is that your personal assets will be protected. Your home, for example, could not be sought by creditors to pay outstanding business debts.

Although other types of corporations will also allow you to limit personal liability, one advantage of an LLC is that business tax liabilities are passed through to members and the business itself is not taxed. The tax benefits, coupled with the simplicity and flexibility, make an LLC a great option for any company that plans to keep ownership restricted to a relatively small number of individuals.

The C Corporation

A standard corporation (commonly referred to as a C Corporation) is helpful for businesses anticipating venture capital funding because it affords more flexibility when multiple investors are involved (and is particularly helpful if those investors won’t be actively involved in day-to-day decisions).

Although C Corps are subject to the “double tax,” this option allows more legal options that offset heavy taxation than an LLC or sole proprietorship. Both the salary and fringe benefits (health insurance premiums etc.) of a shareholder would be tax deductible, for example.

An additional benefit to C Corps is that they can offer stocks and stock options can be a big incentive for keeping and/or attracting employees. C Corps are a terrific choice for companies expecting the type of expansion that would require numerous investors.

The S Corporation

The S Corp’s most attractive feature is pass-through taxation. Similar to LLCs, S Corps are not subject to taxation on the corporate level and personal level. Unlike LLCs, however, S Corps offer many of the benefits mentioned in the C Corp section above.

The key difference between the S Corp and C Corp is that S Corps face more restrictions than C Corps when it comes to those benefits. S Corps are not allowed to have more than 100 shareholders, for example. S Corps also cannot have non-US citizen shareholders. These restrictions do not apply to C Corps. S Corps do have stocks (and the stock options that come with them) so they offer that advantage over LLCs but these stocks are restricted to a single class whereas C Corps are allowed more diversity in stocks.

The S Corp is a great choice for companies that anticipate growth outside of the local market but do not anticipate expanding internationally.

Call J. Cutler Law Today

At J. Cutler Law, we offer free initial consultations for you and your business. We can help you decide what type of entity best fits your business’s needs. Call us today for a free consultation at (801) 618-4469 or contact us online.

How To Make Your Sole Proprietorship Legitimate

If you started a side business as a hobby, or do freelance work as a photographer or writer, then you may already own a sole proprietorship without you even realizing it. Unlike LLCs or corporations, a sole proprietorship is a one-person business that is not registered with the state. Sole proprietors include those that provide work on a contract basis, independent contractors, or commission-only salespersons.

Although sole proprietorships are the easiest business entity to create, there are still business licenses, permits, and other local registrations that you may need to apply for in order to make your business legal and legitimate. 

For example, even if you're running your business as a sole proprietorship, most counties or cities require that you register and obtain a business license. In addition, you may need to obtain an employer identification number (EIN) from the IRS if you have any employees.

Besides a business license or tax ID number, you may also need a certification or license for your specific profession. For example, contractors need a specific license for each type of work they perform and real estate agents need a real estate license. While these may be more obvious examples, it is always important to check your local city ordinances to make sure you don't need a special license to operate your specific business.

Lastly, if you are doing business under any name other than your own (e.g. "Custom Bikes" instead of "John Doe's Bikes") you need to register your "doing business as" name with the state of Utah. This is a relatively simple process and can be done online, however it does require a fee. 

While the relative ease and low cost of starting a sole proprietorship may seem intriguing, it is still worthwhile to consider forming an LLC or corporation instead. The reason being is that a sole proprietor is personally liable for all of the business' debts and obligations whereas the owner of an LLC or corporation is generally shielded from any personal liability. 

To best understand what business entity best fits your need, you can schedule a free consultation with J. Cutler Law. In your initial consultation, we will evaluate your unique situation and recommend a sole proprietorship, LLC, or corporation. And no matter what business entity you decide, we can help guide you along the process of making your business legitimate. 

 

 

 

How do I start my own LLC in Utah?

 

If you are thinking about starting your own limited liability company (LLC) it is important to go over a few questions to make sure an LLC is right for your business. Once you've determined that an LLC is right for you, then there are seven steps to forming and operating your LLC in Utah. However, before we get to those seven steps, let's have a quick refresher on what is an LLC and what are its benefits.

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What is a limited liability company?

A limited liability company is a hybrid business entity, having characteristics of both a corporation and a partnership. Like a corporation, an LLC is a legal entity separate from its owners, thereby shielding its owners from any liability the LLC may incur. However, like a partnership, the LLC is managed without the formalities of corporation and without being tax separately as an LLC.

What are the benefits of an LLC?

A limited liability company is perhaps the most popular entity choice of new entrepreneurs because of the many benefits it provides. The most important being the limited liability it provides to all of the owners. This liability protection is also found with a corporation, however, an LLC is not required to hold annual meetings or comply with the many operational restrictions imposed upon corporations.

This liability protection is similar to a limited partnership, however, unlike a limited partnership, a member of an LLC will not lose the protection of limited liability by participating in the management of the LLC. Thus, business owners who want total control and management of their business, while enjoying limited liability, should choose to form an LLC.

Lastly, an LLC has its own tax benefits. For tax purposes income is only taxed once, i.e., earnings of the LLC are treated as the earnings of its owners and thus no separate tax is imposed on the LLC. 

How do I form an LLC in Utah?

Starting your own LLC can be a straightforward process. However, the State of Utah has some specific LLC requirements that are unique to the state.

  1. Decide on a name for your business. You can choose any name for your LLC as long as it is not already taken and ends with “Limited Liability Company,” “Limited Company” or any variation of its abbreviation—e.g., LLC, L.L.C., LC or L.C.
  2. Assign an agent for service of process. This can be yourself or a registered agent such as J.Cutler Law.
  3. Get an Employer Identification Number (EIN) from the IRS.  This is needed for tax purposes.
  4. Registration. You must file Articles of Organization with the Utah Division of Corporations.
  5. Fees. There is a non-refundable filing fee for Articles of Organization. 
  6. Create an operating agreement. Although it is not required to have a limited liability company operating agreement in Utah, it is recommended to have one, especially if there is more than one owner of the LLC. The operating agreement is recognized by the State of Utah as the LLC's governing document.
  7. Renew your LLC every year. Your LLC must be renewed each year on or before the anniversary date of the formation of the LLC. The renewals are done online with the Utah Division of Corporations. There is a small filing fee.

How much does it cost to form an LLC in Utah?

Currently the filing fee with the Utah Division of Corporations is $70.00. If you were to do everything yourself (register your business name, act as the agent for service of process, get your EIN number, and draft your own operating agreement) this would be your only cost - besides the time it would take you to learn and do all of the above. However, if you would prefer an experienced business attorney to take care of this for you, you can hire a local business attorney. 

At J.Cutler Law, we can form your LLC from start to finish for $400, plus the filing fee. We guarantee you will be satisfied with our service, or your money back. We also provide free lifetime revisions on your operating agreement. In other words, if the ownership or operation of your LLC ever changes, we will update your operating agreement for free. For your initial complimentary consultation, please call us at 801-285-7602 or book online.

Is a corporation the right entity for my new business?

Perhaps the most important decision you'll make when starting your business is what type of business entity you will choose. The most common business entities are a sole proprietorship, partnership, limited liability company, and corporation. In the last part of this series, we will discuss the pros and cons of the corporation.

Corporation

A corporation is a distinct legal entity, both for legal and tax purposes. It is deemed to have an existence separate and apart from its owners, the shareholders. A corporation has all of the powers and rights of a natural person, including the right to own property, to sue and be sued, and to enter into binding contracts.

Although owned by its shareholders, a corporation is controlled by the board of directors, which is elected by the shareholders. The shareholders' participation in the management of the corporation is essentially limited to electing the directors and voting on certain major corporate actions. However, shareholders may elect themselves to the board of directors and may still participate in management.

While the directors control and are permitted to manage the corporation, the board of directors generally appoints officers to manage the corporation's day-to-day operations. In smaller corporations, such as S corporations, the shareholders are often also the directors and officers.

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Pros

  • The corporation enjoys a separate legal existence with its own rights, privileges. and liabilities apart from the shareholders.
  • The shareholders' liability is limited to the amount they paid for their shares in the corporation.
  • Directors and officers are normally insulated from personal liability for the debts and obligations of the corporation.
  • Additional investment are generally easier to obtain, i.e., corporations may obtain investments from third party sources in exchange for the sale of stock.

Cons

  • Corporate formalities must be observed such as annual shareholder meetings and regular director meetings, among other formalities. 
  • Increased cost to form and operate a corporation, i.e., file articles, draft bylaws, shareholder agreements, file annual reports, etc.
  • Potentially decreased personal control of the business because of the separate roles of shareholders, directors, and officers.
  • The profits and losses of a C corporation are subject to double taxation: once at the corporate level when earned; and then at the shareholder level when distributed (does not apply to S corporations).

S Corporation

For legal purposes, an S corporation is no different than any other corporation. However, an S Corporation enjoys certain tax benefits. For instance, an S corporation is considered a pass-through entity, similar to partnerships. In this manner, the S corporation escapes the double taxation on dividend distributions of a C corporation, and the shareholders are allowed to offset losses sustained by the S corporation against their other income. 

Not all corporations may become S corporations.  The corporation must have no more than 100 shareholders, must have only one class of stock, and shareholders cannot be a corporation, LLC, or partnership, among other restrictions.

Summary

A corporation is a good choice for business owners that are seeking to minimize their personal liability, do not mind the increased formalities and operating costs of a corporation, and are seeking outside investors. While the double taxation of income of a C corporations is a downside, most new corporations can quality as an S corporation to avoid this. 

If you have any questions regarding your new business, or would like assistance forming your corporation, schedule a free consultation with J.Cutler Law.

 

Is an LLC the right entity for my new business?

Perhaps the most important decision you'll make when starting your business is what type of business entity you will choose. The most common business entities are a sole proprietorship, partnership, limited liability company, and corporation. The most popular business entity for limiting ownership liability is the limited liability company.

Limited Liability Company

A limited liability company (LLC) may be owned by one or more "persons" (individuals or corporations) known as "members" of the LLC. An LLC may be managed by the members or by an outside manager. 

An LLC is a hybrid entity, having characteristics of both a corporation and a partnership. Essentially, the LLC combines the best of both worlds -- providing for limited liability of all of its members, while retaining the flexibility of the partnership form.

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Pros

  • Not required to hold annual meetings or comply with the many operational restrictions imposed upon corporations.
  • Provides limited liability to all of the members. 
  • Unlike a limited partnership, a member of an LLC will not lose the protection of limited liability by participating in the management of the LLC.
  • For tax purposes income is only taxed once, i.e., earnings of the LLC are treated as the earnings of its members and thus no separate tax is imposed on the LLC.

Cons

  • Must file a certificate of organization with the state.
  • Must enter into an operating agreement.
  • Must file an annual renewal with the state.

Summary

An LLC is the preferred business entity for those wanting to limit their personal liability while also maintaining control of the management of their business. Although an LLC requires more formalities than a sole proprietorship or general partnership, it will likely be worth it if your business runs any risk of personal liability. 

If you have any questions regarding your new business, or would like assistance forming your LLC, schedule a free consultation with J.Cutler Law.

 

Is a partnership the right entity for my new business?

Perhaps the most important decision you'll make when starting your business is what type of business entity you will choose. The most common business entities are a sole proprietorship, partnership, limited liability company, and corporation. In the second part of this series, we will discuss the pros and cons of the partnership.

Partnership

A partnership is formed when two people agree to work together and share the profits of their business. In its simplest form it is two teenagers splitting the profits from their lawn mowing business. The most common partnerships usually involve friends or relatives coming together as co-owners of a for-profit business.

There are generally two types of partnerships, a general partnership and a limited partnership.

General Partnership

A general partnership is one in which there are no limited partners, i.e., There are no partners who are investors only and do not participate in the management of the business.

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Pros

  • General partnerships are permitted to engage in any type of business or profession.
  • There are no formal requirement for organizing a general partnership.
  • Although a partnership agreement is usually necessary, the agreement can be oral.
  • For tax purposes income is only taxed once, the partners are required to report the profits and losses on their individual income tax returns.

Cons

  • Each partner will be subject to unlimited personal liability with respect to the obligations and liabilities of the partnership.
  • Each partner has the ability to unilaterally bind the partnership, unless acting outside the scope of authority.

Limited Partnership

A limited partnership is a partnership where there are one or more general partners and one or more limited partners, i.e., at least one partner is an investor only.

Pros

  • Attractive option for raising capital.
  • Limited partners, i.e., investors, have liability limited to the amount of their capital contributions.
  • General partners maintain management control of the business.
  • For tax purposes income is only taxed once, the partners are required to report the profits and losses on their individual income tax returns.

Cons

  • Requires more formalities than a general partnership, such as filing a certificate of limited partnership with the state and the creation of a partnership agreement.
  • General partners remain personally liable for all partnership debts, obligations, and liabilities.
  • Certain formalities must be observed in order for limited partners to enjoy a shield from personal liability.

Summary

Choosing a partnership for your new business is generally appropriate in situations where your business is likely to remain small and the potential exposure to liability is minimal. If this is the case and you are seeking to raise capital without relinquishing control of your business, then a limited partnership might be a good choice for you. However, if you would like to avoid any risk of personal liability, a limited liability company or corporation may be a better choice.

If you have any questions regarding your new business, or would like to determine if a partnership is right for you, schedule a free consultation with J.Cutler Law.

Is a sole proprietorship the right entity for my new business?

Perhaps the most important decision you'll make when starting your business is what type of business entity you will choose. The most common business entities are a sole proprietorship, partnership, limited liability company, and corporation. The most basic entity is the sole proprietorship.

Sole Proprietorship

A sole proprietorship is when one individual operates a business. For most purposes, a sole proprietorship is seen as an extension of the individual owner and is not treated as a separate legal entity. In its simplest form it is a child at a lemonade stand. Most often it is seen with small, family owned businesses. 

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Pros

  • Is the easiest and simplest form in which to conduct a business
  • There is no paperwork needed to create a sole proprietorship.
  • Very few formal steps are needed to begin doing business.
  • For income tax purposes, income is only taxed once, i.e., the profits and losses of the business activity are reported on the owner's individual income tax return.

Cons

  • The owner is personally liable for of the debts of the business and all of the owner's personal assets are at risk.
  • The source of capital available to the business is limited to the owner and the owner's ability to borrow funds. 
  • The owner cannot seek investment since any investment would mean that the business is no longer a sole proprietorship.

Summary

Choosing a sole proprietorship is generally appropriate only when the following factors are met:

  1. The business is likely to remain small. 
  2. The type of business does not present a high risk of liability exposure. 
  3. The owner does not intend to seek outside investment. 
  4. The owner wishes to avoid the cost of incorporating and the administrative burden of adhering to corporate formalities.

If you have any questions regarding your new business, or would like to determine if a sole proprietorship is right for you, schedule a free consultation with J.Cutler Law.