Serving as the legal advisor to startup businesses is one of the cornerstones of our business law practice. We earn the trust of our clients who are new business owners by learning about the business from Day One (really, from before Day One) and by giving them sound, practical legal advice at a fair price. In most cases, we start out by helping our clients make two fundamental decisions about their businesses: the legal structure and the income tax structure.
The Legal Structure
The two most common legal structures for businesses are corporations and limited liability companies (or LLCs). A corporation is created by filing articles of incorporation with the Indiana Secretary of State. The corporation must also have written bylaws. In addition, there may be subscription agreements, voting agreements, and buy/sell agreements between the shareholders.
While corporations have been around for centuries, the legal liability company, or LLC, is a relatively new creation. We believe that the LLC structure offers so many advantages over the corporation structure that the vast majorities of the business we help organize are now limited liability companies, and we extensive experience in tailoring them to the particular goals of our clients. The basic governing documents – articles of organization and operating agreements – are roughly comparable to the articles of incorporation and bylaws of a corporation, and there may be other documents similar to the shareholder agreements for a corporation. We help our clients decide which structure is best for them. Then we give them advice on what documents are needed and what they should contain. Finally, we prepare the final documents for our clients’ approval and make the necessary filings with the Secretary of State.
The Tax Structure
For businesses that are organized as corporations, there are two basic alternatives for tax struture: Subchapter S and Subchapter C. Subchapter C corporations are subject to “double taxation” because the corporation’s profits are subject to income tax at the corporation level, and then they are subject to income tax a second time when they are distributed to the shareholders as dividends. Subchapter S corporations are not taxed at the level of the corporation. Instead, the profits are “passed through” and taxed only at the shareholder level.
For LLCs, there are three choices of tax structure. The owners can elect for the LLC to be taxed as if it were a corporation under either Subchapter C or Subchapter S, or they can elect for the LLC to be treated as if it were a partnership with income tax being governed by Subchapter K. Like S-corporations, partnerships are also pass-through entities, not subject to income tax themselves, with partnership profits taxed only at the partner level. There are, however, other distinctions that may favor one structure or the other. In cooperation with our clients’ accountants, we help them select the best tax structure for them and file the necessary paperwork with the IRS to implement their decisions.