Entity Formation/Operating Agreements

Helping you choose the right entity for your business

“The world is full of people who have dreams of playing at Carnegie Hall, of running a marathon, and of owning their own business. The difference between the people who make it across the finish line and everyone else is one simple thing: an action plan.”
— John Tesh

There are many aspects of small business ownership that should be considered before the business begins. Of paramount importance is making the decision regarding what type of entity should be formed. This choice will almost always have a direct financial consequence on cash outflows (for such expenses as taxes, compliance, and potential creditor judgments at the business and/or individual level).

What Type of Entity Should I Choose when I Start my Business?

There are many considerations that factor into which entity choice to select for a new business. Some of these considerations are:

  • Number of owners
  • Relationship amongst owners (family, unrelated, etc.)
  • Citizenship status of owners
  • Industry in which the business operates
  • Projected revenues of the business
  • Projected net income of the business
  • How much money the owner anticipates drawing from the business
  • Whether the owner wants to report the information on his/her personal taxes
  • Liability to creditors
  • Whether the owner will perform substantial services for the business
  • Whether the owner anticipates materially participating in the business
  • The personal tax situation of owner(s)
  • Compliance requirements for each type of entity
  • State of incorporation
  • Actual and projected income tax rates at the time of business formation

In almost all cases, given how easy it has become to form Limited Liability Companies in most states, it is seldom a good idea to remain as a sole proprietorship or partnership that is unincorporated under state law.

After I Make an Entity Choice Selection, What’s Next?

For businesses that choose to incorporate under state law as a Limited Liability Company or Corporation, there are various steps to navigate in the process. This process varies by state and by entity. In addition, there are Internal Revenue Service filings that must be made for many businesses to open a business bank account, register for employment taxes, and many other customary business functions.

For business owners who need consulting services with navigating the completion of the forms for selecting a business entity, my firm is happy to help. Important to mention is that I am licensed as an attorney in the state of North Carolina, thus while I can assist business owners in other states with what forms are required and the process, I cannot directly file any legal forms on behalf of a business in any other state.

Operating Agreements

An operating agreement is an important element of starting a business, especially when more than one owner is involved. The operating agreement is essentially the “constitution” for the business and determines how the business will be governed. These agreements contemplate potential pitfalls before the business is established (usually when parties are on good terms). It is much easier to agree on terms before there has been discord among ownership.

Even if there is only one owner, it can still be beneficial to create an operating agreement if the business owner anticipates adding other owners in the future or acquiring other companies. This document would reflect the desires of current ownership and can provide a starting point for potential new owners or future-acquired companies to determine how the current owner wants the business to run. This would make the process easier when a new owner is added or a business acquisition is on the horizon.

Terms of operating agreements are determined by ownership and oftentimes supercede state law (which oftentimes operates as a default in the absence of one of these agreements) with respect to a particular Limited Liability Company or Corporation. Without one of these agreements, ownership is subject to whatever the state’s default laws are with how their entity will be run.

Firm Pricing for Entity Formation/Operating Agreements

The firm charges a rate of $175 per hour for business entity formation consultation and/or drafting of operating agreements. An upfront retainer is required for estimated scope of work. For potential clients that are interested in these services, please contact us to receive an estimate.

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