Business Law

Businesses can be set up in a variety of different forms including:

A corporation is legal entity wholly separate and apart from its owners (the shareholders or "stockholders"). A Louisiana corporation is formed by filing the articles of incorporation with the Louisiana Secretary of State. The articles of incorporation must contain: the name of the corporation, the purpose or purposes for which the corporation is formed, or that the corporation can engage in any lawful activity allowed by Louisiana law, the duration of the corporation or that it has a perpetual existence, and the number of shares the corporation shall have authority to issue.

The document may also include:

Once the articles are filed they become part of the public records and anyone can obtain the information in the articles of incorporation.

Corporations usually have a set of bylaws which govern how the corporation is run. These bylaws are not generally a public record. The bylaws are adopted by the shareholders who formed the corporation or by the board of directors elected by the shareholders. The bylaws can later be changed by a vote of the shareholders or the directors, depending upon the provisions of the articles of incorporation or the bylaws themselves.

Corporations enjoy many advantages as a business form. Perhaps the most important advantage is that a corporation's stockholders, directors, and officers are not liable for the debts or other obligations of the corporation. Usually they are liable only for debts or other obligations which they have personally guaranteed or that result from their own negligence or misconduct.

Because it is a separate entity, a corporation is not terminated or dissolved upon the death or departure of a shareholder. As a result, upon the death of a shareholder the assets of the corporation are not tied up in the shareholders estate.

Smaller corporations are often "closely-held," that is, the shares are owned by a small group of shareholders and have restrictions on transfer. The shareholders of smaller corporations commonly enter into a "buy-sell" agreement which limit the sale of the shares. This type of agreement ensures that if the shareholder wishes to sell his shares they will be offered back to the existing shareholders or the corporation.

A limited liability company ( "LLC") is an unincorporated business entity that has the best characteristics of corporations and partnerships. The owners of an LLC are called members instead of stockholders or partners.

Like a corporation, an LLC shields its members from personal liability for the debts and obligations of the business, and like a partnership, the income and losses from the LLC are usually not taxed at the entity level, but instead are taxed at the individual level.

An LLC is formed by filing "articles of organization" with the Louisiana Secretary of State. The members of an LLC usually enter into an operating agreement that regulates how the LLC is governed. The provisions of the operating agreement can provide for how the LLC will be managed, what happens upon the death of a member, how a member's interest can be transferred, and it can provide for a "buy-sell" agreement among its members.

An LLC can have an unlimited number of members and there are no restrictions on the type of persons who can be members. Some states do not allow one person LLCs , however, Louisiana does allow an LLC to have only one member. Additionally, an LLC can have more than one class of equity interest, as well as wholly owned subsidiaries whose assets, liabilities, and operating results are treated independently from those of its LLC parent.

One advantage of an LLC over a corporation is that there is more flexibility in management. For example, an LLC can be managed in the following ways:

The sole proprietorship is the simplest and most common form of business entity. A sole proprietorship is a business that is conducted by a single individual owner (the "sole proprietor"). Sole proprietors can conduct business under their own name by simply doing business, for example, as "Jane Jones." A sole proprietor can also do business under a trade name (sometimes called a "fictitious name") such as "Joe's Grill." If a sole proprietor operates under a trade name or fictitious name, the sole proprietor should file a form ("trade name certificate") with the Louisiana Secretary of State. A sole proprietorship may have employees and is permitted to carry on most businesses.

Some of the advantages and disadvantages of a sole proprietorship are set forth below:

Advantages

Disadvantages

The federal tax treatment of corporations is governed by the Internal Revenue Code. Attorneys, accountants, and other professionals usually refer to the types of corporations and their tax treatment according to the provision of the tax code that applies to that type of corporation. For tax purposes, there are two main types of corporations:

A "C" corporation is taxed at the entity level. By taxing at the entity level the corporation itself must pay income taxes. Income that has been taxed at the entity level will again be taxed if, and when, it is distributed as dividends to shareholders. This double taxation is perhaps the single greatest disadvantage to operating as a "C" corporation. However, "S" corporations may avoid much of this double taxation.

Despite double taxation, corporations do enjoy some tax-related advantages when compared to other business forms. Because the corporation and the owners each pay income taxes it may be advantageous to use a corporation in a business that requires capital to be retained to fund the purchases of equipment, machinery, and other assets. In this case the corporation and the owners combined income is divided between two taxpayers, thus potentially making the overall marginal tax rate lower.

For example, if a capital-intensive business is conducted as a sole proprietorship, an L.L.C, or a partnership, the owners would be individually taxed (possibly at the 39.6% top rate) on the earnings, even if they had to leave all or part of these earnings in the business to fund the acquisition of machinery and equipment. However, a corporation is not required to distribute earnings to its shareholders and can use them for corporate purposes. If the corporation has a lower marginal tax rate than the owners then more dollars are available for capital acquisitions. For example, if the corporation's income is less than $50,000.00 its tax rate is 15%, if its income is over $50,000.00, but less than $75,000.00, its marginal tax rate is 25%, and if its income is over $75,000.00, but less than $100,000.00 its marginal tax rate is 34%. If these tax rates are lower than the owner's marginal tax rate then there is more money available for capital expansion.

There are, however, limitations on the amount of earnings a corporation can accumulate before it must distribute them to shareholders or use them in the business. Otherwise, the corporation may face an additional tax on the accumulated earnings.

Certain small companies with no more than 75 shareholders and meeting certain requirements (only one class of common stock and only certain types of shareholders) can be taxed as an S corporation. An S corporation is also limited in the shares it may own in another S corporation.

If a corporation elects to be taxed as an S corporation and qualifies, it will be taxed in a manner similar to a partnership or limited liability company. That is, the income, losses, and gains will be passed through directly to the shareholders and there will be no tax "at the entity level."

Unless it elects to be taxed as a corporation, the tax treatment of a limited liability company ("LLC") is the same as that of a partnership or sole proprietorship. That is, the profits and losses are passed through to the members of the LLC and there is no tax at the entity level. In such a case the LLC is a tax reporting entity, it files a tax return, but it does not pay any taxes. Instead, the taxes are paid by the members of the LLC. Each member of an LLC should receive an IRS Form K-1 which will set forth the members profits and losses from the LLC. The members use the IRS Form K-1 in preparing their own tax returns and accounting for their income or loss from the LLC.

A sole proprietorship does not have any existence separate and apart from the individual sole proprietor. As a result, any income that is earned from the business is considered the income of the individual owner. The sole proprietorship itself is not separately taxed, rather the sole proprietor reports business income and expenses on his own tax return and pays taxes accordingly. The sole proprietor's business income and expenses are usually reported on Schedule C of the taxpayers individual federal income tax return.

Whether a business is started over the kitchen table or is a multi-million dollar high-tech startup, operating a small business can raise numerous legal and financial questions. Attorneys, accountants, and other professionals, operating within their professional roles, can provide information and assistance that is vital to the success of a business enterprise.

For example, the tax effects of starting a business or acquiring a business can be extremely complex.

Other useful web sites for business owners and those considering going into business are: