This is the simplest, least regulated and most common form of business organization. If a person opens shop and does nothing else regarding legally forming the business, this is the type of entity they have. They have total control of business operations and a complete share of the profits. The downside to this type of entity is that all of the personal and business assets are at risk for liability.
This legal form of business comes into existence if there are two or more people who carry on the business for profit as co-owners. Each partner has a right to participate in the partnership and share in the profits and be liable for the debts. It is a good idea to formally reduce the agreement to a written document. Generally, each partner has joint and unlimited personal liability for the obligations of the partnership.
A limited partnership has a general partner and limited partners. The general partner manages the partnership. The limited partners invest in the partnership and share in profits without personal liability for partnership debts. A limited partner in Georgia may also participate in control of the business. Limited partnerships are required to report the formation of the entity to the Secretary of State.
A corporation is separate from its owners, who are shareholders. Control of the corporation is maintained by the shareholders, board of directors and officers, all of whom may be the same or different persons. Limited liability and tax benefits are the reasons many businesses choose to incorporate. To form a corporation, a name must be reserved and documents incorporating the corporation filed with the Secretary of State. There are two types of corporations: A “C” corporation and an “S” corporation. These names are taken from the IRS Code. A C corporation is taxed at both the corporate level and the individual level when the corporate dividends are issued (think Home Depot or the Coca Cola Corporation). An S corporation is a small business corporation. This is the entity of choice for small businesses because no income tax on profits is due at the corporate level, but only when dividends are issued to the shareholders, essentially eliminating the double taxation that is required for a C corporation. There are additional requirements that must be met to qualify as an S corporation.
Limited Liability Company
A limited liability company (“LLC”) is a business entity organized under state law similar to a corporation and is essentially a cross between a partnership and a corporation. The following are additional characteristics of an LLC:
- Taxes can be structured like a partnership or a “C” corporation depending on choices made by the members and depending upon the election made at the time of filing the tax return (most entities use partnership taxation to avoid double taxation which is imposed on C corporations).
- The LLC is owned by one or more members and management rights can exist between all of the members or be limited to one or several managers with the members only exercising ownership (similar to the difference between shareholders and officers or directors of a corporation).
- Like a corporation, the LLC has perpetual existence (unlike a partnership). If a key member dies, the entity continues on.
- A member of the LLC can be another entity such as a corporation or another LLC.
- Limited liability is provided for the members who risk only the investment in the business. Other personal assets are not at risk unless a debt has been personally guaranteed. Georgia statute provides that even if the formalities relating to the exercise of power or management are not followed, the members will not be subject to liability. This is probably the best reason to use an LLC rather than a corporation to provide liability protection.
- Setting up an LLC is similar to a corporation in that Articles of Organization are filed with the Secretary of State.
- Unlike a corporation, annual meetings and minutes are not required.
- The operating agreement of an LLC is similar to the bylaws of a corporation. The operating agreement provides for the conduct of business of the company. Unlike a corporation, which requires a separate buy-sell or shareholders’ agreement, the operating agreement of an LLC can encompass many other requirements of the company including the buy-sell agreement. The operating agreement can simply be changed by Amendment signed by all of the members.
This is a short overview of the different forms of business entities and does not include any of the taxable consequences or advantages or disadvantages in forming these entities. Please contact my office for more information.
An organization can be not-for-profit, yet still be subject to federal income taxes. Section 501(c)(3) of the Internal Revenue Code specifies which organizations qualify for tax-exempt status.
Creating a Tax-Exempt Organization
The following types of organizations are those that qualify: Religious, charitable, testing for public safety, organizations that foster amateur sports competition, scientific, literary, educational, or aid in the prevention of cruelty to children or animals. To qualify, these organizations must not be organized for a profit and must have an exempt purpose.
Section 501(c)(3) has many advantages for a nonprofit organization. In addition to obtaining exemption from federal income tax, the other advantages are:
- Assurance to donors of deductibility of contributions
- Exemption from certain state taxes
- Exemption from certain Federal excise taxes
- Exemption from taxation on purchases of goods
- Nonprofit mailing privileges
There are also some disadvantages:
Continuous planning to maintain the status of tax-exemption
- Records of meetings are open to the public, not just the membership
While it is most certainly advantageous for all nonprofit organizations to request tax-exempt status, those organizations that have gross receipts each year in excess of $5,000 are required to apply for tax-exempt status.
The IRS form used to apply for tax-exempt status is Form 1023. Prior to filing, an organization must have some form of business entity, most commonly, a corporation. This requires registration with the Secretary of State, approving bylaws and obtaining a federal identification number.