BUSINESS AND COMMERCIAL (UCC) SERVICES

CORPORATE INFORMATION - ENTITY DESCRIPTION

When starting a business there are several business forms or organizations to choose from. A variety of organizational structures are available to transact business in Arkansas. In deciding which form of business is appropriate for your venture a lawyer, CPA, tax advisor or financial advisor can provide critical information. Choosing the proper business entity for your business is critical to the success of your project.

One of the primary considerations in selecting a business organization is protection of the owners of the business from liability. Other considerations include tax treatment by the federal and state government, management structure, future ownership, and capitalization. Arkansas laws determine how particular entities should be set up and conduct their business. These laws are very specific and set out the legal responsibility of each business form. In addition taxing authorities and regulatory agencies also have laws that pertain to business.

There is much written on choosing and how to set up the proper form of business for your needs. Information can be found at libraries, small business development centers and on the Internet. However in the end, legal counsel or a certified public accountant may be needed to help you make the decision. The most common business structures are as follows.

Most Common Business Structures Sole Proprietorship Partnership Limited Partnership Limited Liability Partnership Corporation S Corporation Limited Liability Company Nonprofit Corporation

Sole Proprietorship

A business with a single owner with no formal or separate form of business structure is known as a sole proprietorship. The owner has sole control and responsibility of the business. A sole proprietorship is easily formed, allows important decisions to be made quickly, and typically has fewer legal restrictions. In this situation the owner and the business are indistinguishable. The business has limited life and cannot be transferred to others. The sole proprietor’s responsibilities include:

• Obtaining all capital
• Personal liability for all debts and claims against the business
• Claiming all profits and losses on the owner’s personal income tax return
• Obtaining state and local business licenses and permits
• Recording the name of the business with the local circuit clerk

Partnership

A partnership is an association of two or more persons acting as co-owners of a business. A partnership can be created by an oral or written agreement between the parties involved. However a written agreement is highly recommended. This agreement should set out the responsibilities and obligations of the partners as well as the percentage of ownership.
A general partnership:

• Requires no official registration beyond that required for a sole proprietorship
• Does not protect the personal assets of the business partners from claims against the partnership
• Is required to file informational returns with the Internal Revenue Service and Arkansas Income Tax Division
• Shares its profits and losses among the partners according to their ownership percentage. Partners are then required to claim this income or loss on their personal income tax return

Limited Partnership

Limited partnerships (LPs) are more intensely regulated than general partnerships. LP’s consist of general partners and limited partners. The general partner(s) manages the business and have no liability protection. The limited partner(s) are usually investors that are not involved in the day-to-day running of the business and whose liability is limited to the extent of their investment.
Limited partnerships:

• Are treated like a partnership by the Internal Revenue Service
• Were originally developed for real estate development ventures
• Are created by filing a certificate of limited partnership with the Secretary of State

Limited Liability Partnership

A limited liability partnership (LLPs) is much like a limited partnership. However the LLP allows all the partners to take an active role in the management of the business while offering members some liability protection from actions of the other partners. LLP are mast often used by groups of professionals such as doctors, accountants or architects.
Limited liability partnerships:

• Are treated like partnerships by the Internal Revenue Service
• Do not provide liability protection against actions of one’s self
• Are created by filing a qualification of limited liability partnership with the Secretary of State

Corporation

A corporation is a more complex form of business organization. The corporation is a legal entity and exists apart from its owners or shareholders. As a separate entity, the corporation has its own rights, privileges and liabilities apart from the shareholders, officers and board of directors. A corporation can buy and sell property, enter into contracts, sue and be sued. Elected officers and its board of directors manage the corporation.
A corporation:

• Is created by filing its Articles of Incorporation with the Arkansas Secretary of State
• May be formed for profit or for nonprofit purposes
• Is unaffected in its duration by death or transfer of shares by any of the owners
• Requires more extensive record keeping
• Pays taxes on its profits; profits are distributed to its owners via dividends and are taxable by state and federal taxing authorities

S Corporation

The S Corporation is a corporation that elects to be taxed under Subchapter S of the Internal Revenue Tax Code. Being an S-Corporation is a tax matter only. S Corps are “tax pass through” business entities, meaning their profits and losses are reported by its owners on their personal tax returns.
In addition, the S Corporation:

• Is a corporation in the view of the state and complies with state corporation laws
• Must have only one class of stock
• Must be made up of shareholders that are individuals, estates, or trusts, but not corporations
• Can only have shareholders that are United States citizens or residents
• Cannot be a member of an affiliated group of corporations
• Is limited to 75 shareholders
• Is created by filing its Articles of Incorporation with the Arkansas Secretary of State

Limited Liability Company

The Limited Liability Company (LLC) combines many favorable characteristics of corporations and partnerships. The LLC provides limited liability to its members and offers them the same IRS tax treatment as partnerships.
A Limited Liability Company:

• Must file Articles of Organization with the Arkansas Secretary of State
• Allows members to manage the company themselves or to elect managers
• Allows members to engage in management without risk of losing their limited liability status
• Is a relatively new form of business organization
• Enjoys less regulation on record keeping
• May be taxed by the Internal Revenue Service as a corporation or as a partnership, depending on its structure
  

Nonprofit Corporation

Nonprofit corporations are created for public benefit, for mutual benefit for its members, or for religious purposes. Nonprofit corporation status does not guarantee that the organization will be granted tax-exempt status, nor does it ensure that the contributions to the organization are tax deductible. Becoming a nonprofit corporation is generally a prerequisite to applying for tax-exempt status under IRS Code section 501(c)(3).
Nonprofit corporations:

• May not have shareholders or pay dividends
• May compensate members, officers, and trustees (in reasonable amounts) for services rendered
• May have specific provisions in its article of incorporation dealing with property distribution upon dissolution
• Are created by filing its Articles of Incorporation with the Arkansas Secretary of State

UA Legal e-Source - Visit for more information on starting a Nonprofit Business

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