How to Form a Business Entity

Introduction

• Creating a new Business Entity can seem complicated and confusing. Where do you start?
• Luckily, the process is the same regardless of industry. Any organization can use these simple steps to create their own business entity.
• In this post, we’ll explain why setting up a business entity correctly is important, how to form a business entity, and 3 tips to save you time and money.

What is a Business Entity, and Why Does it Matter?

A business entity is an organization that is formed to conduct business. The type of entity affects how your business is taxed and offers liability protection.

The largest reason to form a business entity is to provide liability protection to its owners. A business entity is a way to pool assets and limit risk.

Why It Matters: It’s important to create a business entity to protect its owners and their assets.

How to Form a Business Entity

1. Identify the business structure of your entity.

These are the four most common entities to choose from, all with unique attributes:

1. 1. Limited Liability Company (LLC)
   2. Limited Liability Limited Partnership (Triple LP or LLLP)
   3. Limited Partnership (LP)
   4. Corporation

Below is a summary of each one and what makes them different.

Limited Liability Company (LLC)

• An LLC can be either member-managed or manager-managed, but ownership lies solely with the members.
• An attractive feature of an LLC is that the members/managers are largely protected from individual liability for corporate debt.
• Potential tax benefits (consult your CPA).

Limited Liability Limited Partnership (Triple LP)

• An LLLP only has General partners, who enjoy limited liability.
• Commonly used for group ownership of a tract of real property.
• Partnership tax benefits.

Limited Partnership (LP)

• An LP has two types of partners: General and Limited. General partners do not enjoy limited liability, but Limited Partners are only liable up to their contribution. Must have at least one of each type of partner.

Corporation

• Corporations are owned by their shareholders.
• Liability is limited to the extent of your contribution.

2. Select a name for the business entity

Search via the NC Secretary of State website as to whether a certain name is registered.

3. Register with the North Carolina Secretary of State

The registration requirements are different for each type of entity. Make sure to consult your attorney so you are registering correctly.

• Limited Liability Company
  • Requires Articles of Organization
• Limited Liability Partnership
  • Requires Application for Registration as LLP
• Limited Partnership
  • Requires Certificate of Limited Partnership
• Corporation
  • Requires Articles of Incorporation

4. Execute Additional Paperwork

Consult your attorney for more details.

• Limited Liability Company
  • The Operating Agreement – an internal document that details the ownership interest of the LLC, as well as identifies the members and/or managers
  • Additionally, the Operating Agreement lays out the formation of the LLC, the business purpose, and procedures for meetings, among other provisions.
• Limited Liability Limited Partnership
  • A Partnership Agreement should be executed governing the LLLP.
• Limited Partnership
  • A Partnership Agreement should be executing the LP.
• Corporation
  • Bylaws govern the operations of the corporation by detailing, among other provisions, the Board of Directors, Officers, meeting details, and office location.

Tips on Forming a Business Entity

Tip #1 – Think about the long-term. Give it plenty of thought as to what type of entity works best for you and your business.

Tip #2 – Consult your attorney. Don’t try to do this yourself – leave it for the experts!

Tip #3 – Hire an (excellent) accountant. They will be an important player in forming your business, so it’s best to go ahead and hire one now.

Closing

Remember, forming a business entity is simple if you follow these steps.

1. Identify the business structure
2. Select a name
3. Register with the North Carolina Secretary of State
4. Execute additional paperwork

Want to read more information? Read our FAQ page about Business Formation here: https://hscattorneys.com/business-formation-faqs/.

Ready to form a business entity? Set up a consultation today.
(919) 859-6840 | Hannah Sheridan & Cochran