BUSINESS …what are the alternatives to incorporation

We are often asked to provide advice to clients concerning what business enterprise form would be most suitable for the initiation of a new business, or the continuation of an established business. When business people lay the ground work for their enterprise, they must pay careful attention to the legal structure of their business. The decisions they make should be informed decisions. The final decisions they make will have a direct bearing on their liability, tax status, managerial control and funding sources. An individual or group of individuals may conduct a business venture through a number of possible legally recognizable forms: sole proprietorship, general partnership, limited partnership, joint venture, limited liability company, limited liability partnership or corporation.

What is a Sole Proprietorship?
A sole proprietorship is the simplest business organization. A proprietorship is completely owned and controlled by one person. As the holder of the business assets, they reap all the profits, but are also personally responsible for all losses and liabilities. The sole proprietor and his or her business are one and the same and have a common identity.

Forming a Sole Proprietorship
The commencement of a sole proprietorship is relatively simple due to the general lack of required legal formalities. The person operating the sole proprietorship must obtain a federal identification number, and if the sole proprietor has employees, he or she is responsible for withholding income tax, social security, and unemployment tax. In addition, the sole proprietor must pay self employment taxes and make quarterly estimated tax payments on the income from the sole proprietorship.

What is a Partnership?
Partnerships are organizations that are owned and controlled by two or more persons. The partners share in the profits, losses, control and liability of the business. Under a limited partnership, the limited partners are protected from personal liability - they only risk losing their capital investment.

Forming a Partnership
A written partnership agreement, before commencing the business is highly advisable. The partnership agreement should include the name and address of the partners, the purpose and location of the partnership, capital contributions, accounting system, division of profits and losses, terms upon retirement, withdrawal, expulsion and death, sales to third parties, management rights and dissolution. The partnership must apply for a federal employer identification number and then is responsible for withholding income taxes, social security, and unemployment from its employee’s wages. Partners also have to pay self employment taxes and make quarterly estimated tax payments on their share of the partnership income.

What is a Corporation?
A corporation is a legally separate entity, which is distinct from the business’ individual owners. The corporation can acquire property, inventory and equipment, and can sue or be sued.

Forming a Corporation
In order to form a corporation in the State of Wisconsin, articles of incorporation must be filed with the Wisconsin Department of Financial Institutions, after selecting the appropriate corporate name. A number of documents will need to be drafted in order to organize your corporation.

The most important documents in the formation of a corporation are the articles of incorporation. The articles of incorporation are supplemented by bylaws which lay out the day to day operating rules of the corporation. It is common for a corporation to have a minute book in order to place all of the basic documents constituting the formal records of the corporation in one central place. The corporation must obtain a federal employer identification number and then must withhold income taxes, social security taxes, and unemployment taxes from its employee’s wages. In most cases, the stockholders elect a small group of directors to set policies of the corporation and to manage its day to day operations. The directors then elect the corporate officers to carry out the normal business functions of the entity.

Ownership Liability for Business Debts
The major distinction between a sole proprietorship and partnership as compared to corporations is a concept known as “limited liability.” The sole proprietors and each partner of a partnership are personally liable for all the debts of the business. Owners of a corporation, known as stockholders, have limited liability. They are not personally liable for the corporation’s obligation, except to the extent these debts may exceed what was paid by the individual shareholders for their stock. At times this “limited liability” may be an insignificant advantage for newly formed small businesses. With a new small corporation, stockholders are often required to personally guaranty their corporation’s loans and large accounts payable.

What is a Limited Liability Company or a Limited Liability Partnership?
The newest forms of business organization in Wisconsin are the Limited Liability Company (“LLC”) and the Limited Liability Partnership (“LLP”).

An LLC can be an organization of only one person, which provides more liability protection than a sole proprietorship. An LLC can also have multiple owners who are free to structure their economic and management relationship to suit their needs. An LLC combines the best features of a partnership and a corporation. While liability is limited to only your initial capital contribution as in a corporation, an LLC offers the flexibility and tax benefits of a partnership. An LLC also has fewer formal statutory requirements than a corporation. An LLC may sue and be sued just as a corporation, but most are not considered to be an income tax paying entity under the Internal Revenue Code.

An LLP is modified partnership, offering the limited liability of a Limited Partnership without the limitations on management and participation in the business affairs.

Where do I Start?
The decision of what legal structures to adopt can be filled with complicated details, elections, tax implications, liability concerns and legal questions. It is certainly not a time to make assumptions. It is a time to seek good professional advice. Whatever legal structure you choose for your business, have it custom tailored in properly drafted legal documents that satisfy all of your concerns. The firm of Clair Law Offices, S.C. is pleased to provide legal services to Wisconsin businesses in the area of business organization, estate planning, partnership, joint ventures, real estate and land development.

For more information or specific questions you have, please contact us.

Click here for our Contact Information.
Click here to go back to our Practice Area list.

This information which is based on Wisconsin law is issued to inform and not to advise. No person should ever apply or interpret the law without the aid of a trained expert who knows the facts, because the facts may change the application of the law.