Incorporation, also known as a limited liability company (LLC), is a flexible form of business enterprise that incorporates elements of both partnerships and corporate structures.
It is a legal form (for a small business or company), that provides limited liability to its owners. In more basic terms, it is a hybrid business that has certain characteristics of both corporation services and a partnership or sole proprietorship. This, of course, is dependent on the number of owners there will be within the company. An LLC is a type of unincorporated association and is not a corporation. The greatest similarity an LLC shares with a corporation is limited liability. The greatest similarity it shares with a partnership is the availability of pass-through income taxation. More times than not, it is more flexible than corporation services and is well-suited for companies with a single owner.
An LLC can choose to be taxed as a sole proprietor, partnership, C corporation or S corporation (as long as the small business qualifies for such tax treatment), resulting in a great deal of flexibility. Another advantage to organizing an LLC is that it involves much less administrative paperwork and record keeping than a corporation does. The structure of a limited liability company, or LLC, makes it relatively easy to give new partners stakes. While giving new partners stake is relatively easy but sharing equity works a bit differently than it does in corporation services.
In an LLC, there are two types of equity compensation: a capital interest and a profit interest. A capital interest entitles a partner to a share (cut) of the profits as well as an interest in the company assets. On the other hand, a profit interest entitles a partner to a share of the profits but not an interest in the company assets. The difference becomes important when the company is sold. When selling an LLC, a capital interest entitles the partner to a share of the proceeds, but a profit interest entitles the owner a cut only of the company’s increase in value. Capital interests become taxable upon receipt, but profit interests typically aren’t.
If your new partner chooses to not invest in the small business startup, then it is recommended that they put in three to five years before claiming full interest. You can vest over time or present the whole package at the end. If your partner leaves early or can’t meet performance goals, they forfeit their unvested share. On the other hand, if they do invest capital, they should receive a fully vested capital interest.
You will need the counsel of an attorney and a financial adviser, and these specific details should be outlined in the operating agreement. You should also draw up a buy-sell agreement that specifies when your partner can sell the stake, to whom, and at what price. This will help to shield the company from being sold to a competitor, stranger, or unwanted partner.
If you are interested in organizing an LLC please follow the link below to find your appropriate state forms that need to be filed.
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