Have you been thinking of starting your own business, but don’t know where to start? Have you ever been curious what the differences are between various corporate forms? This article is the first of a three-part series which will provide an overview on the law in Indiana regarding: (1) corporations; (2) partnerships; and (3) not-for-profit organizations. This series of articles is an overview, and a central part of starting your for-profit or not-for-profit business is to consult a business lawyer and accountant to ensure that your new business meets your specific needs.
Our first topic is corporations. Corporations in Indiana can be generally divided in to two categories – Informal and Formal. Information corporates do not require any formal filing with the Secretary of State to become active. However, every entity doing business in the State of Indiana must register with the Secretary of State and follow certain state law requirements to conduct business in the State (i.e. appointing a registered agent, maintaining insurance, etc.).
Informal associations include two primary corporate forms: (1) Sole Proprietorship; and (2) General Partnership.
A Sole Proprietorship consists of one person who conducts business for profit him or herself. The sole owner assumes complete responsibility for all liabilities and debts of the business. In a sole proprietorship, the income of the business is reported as part of the owner’s personal income and is therefore only taxed at the individual level.
A General Partnership is two or more individuals acting as co-owners of a for-profit business. Partnerships should generally operate under a written Partnership Agreement to avoid future problems. All partners are responsible for the liabilities and debts of the partnership. Partnerships also enjoy single taxation in which income is reported as part of each partner’s personal income.
Formal associations requiring filing with the Indiana Secretary of State before they come into existence. The three most common types of formal associations are: (1) Corporation; (2) S-Corporation; and (3) Limited Liability Company.
A Corporation is a legal entity which is created by filing Articles of Incorporation. The Corporation itself assumes all liabilities and debts of the Corporation. A corporation is owned by shareholders. A shareholder enjoys personal protection from the corporation’s debts and liabilities. Corporations are taxed twice, once at the corporate level and once at the employee level when a wage is paid or at the time the corporation distributes money to a shareholder – called a dividend. Dividends are taxed as capital gains, which is a different rate than that for regular income tax.
After filing Articles of Incorporation, a Corporation may seek to obtain S-Corporation status for federal income tax purposes. The income of an S-Corporation is taxed only once, at the employee or shareholder level. To qualify, the corporation may not have more than 75 shareholders and must meet other certain Internal Revenue Service criteria. The corporation must submit IRS Form #2553 to the IRS. An S-Corporation is considered a corporation in all other respects and is subject to no additional or special filing requirements with the Secretary of State.
A Limited Liability Company is a formal association which combines the advantage of a corporation’s limited liability and the flexibility and single taxation of a general partnership. An LLC has members rather than shareholders. A member enjoys personal protections from the liabilities and debts of the LLC. Although not required by law, an LLC should operate under an Operating Agreement which is like a Partnership Agreement. If the LLC qualifies under IRS guidelines, it may be taxed only once, like a partnership, at the employee or member level, while not having the same restrictions as an S-Corporation.
You should seek advice from a qualified lawyer and an accountant prior to starting your business, so that you can be sure the corporate formation has the legal and taxation requirements that meet your needs and ensure maximum success.