BUSINESS LAWOnce a decision has been made to form a business, a number of subsequent decisions have to be made. They are important and getting a business set up properly from the very beginning will save headaches down the road. An individual or several individuals have choices of the type of business that they can establish: Sole Proprietorship. As the name implies, this is for a solitary owner. It is a simple way to do business and a lawyer's role in the set-up is minimal. Nevertheless, you should consult with an attorney if in fact a Sole Proprietorship is the way the business should be run. If it is determined that a Sole Proprietorship is the proper approach, then the accountant or CPA becomes the principal contact. The Sole Proprietorship has one very important drawback. Liability of the individual running the business is not protected. In other forms of businesses, there is limited liability protecting the owner. Since a single owner may set up a Corporation or a Limited Liability Company, another form of ownership may be a better vehicle. Partnership. A Partnership consists of two or more individuals who get together to conduct a business. This can be a General Partnership, a Limited Liability Partnership, and a Limited Partnership. Each one of these has different characteristics and the limit on liability differs with each form of partnership. A General Partnership is started with a certificate of co-partnership. No written form of a partnership agreement is required to form a partnership. Such an agreement, however, is desirable and should be drafted so as to spell out the responsibilities of each partner. A Limited Liability Partnership protects the owners of the partnership from personal liability for obligations of the partnership arising out of the acts and omissions of other partners. A Limited Liability Partnership is registered with the State of Michigan and it is renewed annually. Again, no written partnership agreement is required, but it certainly would be preferred. A Limited Partnership is one where you have a general partner or partners and one or more limited partners. Limited partners who participate in management may have liability. Those who do not participate are not liable for the actions of others. Again, the certificate of Limited Partnership must be filed with the State. Limited Liability Company (LLC). This is a fairly new form of business and is becoming more and more popular in the State of Michigan. A Limited Liability Company files Articles of Organization with the State of Michigan. These must be written. Usually a Limited Liability Company has an Operating Agreement. This is not required. It is very advisable that an Operating Agreement, in fact, be prepared and agreed to. Corporation. Corporations are organized under the laws of the State of Michigan. An election needs to be made at the very beginning on how the Corporation is to be taxed. The Corporation is either an "S" Corporation or a "C" Corporation. An "S" Corporation is taxed much like a Partnership. A "C" Corporation is taxed directly by the Federal Government. Whether or not one wants an "S" corporation or a "C" Corporation, is a decision that should be made in consultation with a CPA as well as an attorney. They both have Articles of Incorporation which are filed with the State, By-Laws, and usually have various contracts among the shareholders to buy one or the other out, should the Corporation owners wish to retire or if they die.
Each of the forms of business which I have detailed above has different tax ramifications as well as individual and business liability ramifications. Regardless of the form of the business that is selected, decisions should be made at the very beginning of the creation of the business. Properly preparing documents ahead of time will then be available so that when disputes arise (and disputes usually do arise at one time or another) the issues may be peaceably resolved. Sometimes bringing these issues up at the very beginning causes people to think about them, and to make decisions so they don't have to worry about them later. For example, a Buy-Sell Agreement spells out how ownership is to be transferred upon the death or retirement of an owner. It can set a value for the business or a formula for determination of the value. Insurance policies can be purchased to fund the value upon the death of an owner. Proper preparation will not only save time, but may even determine whether a business ultimately continues or not. If I can be of further help to you, please feel free to call me at 1-800-980-0507 or e-mail me.
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