Philanthropists often ask if an LLC can be a non-profit. What they are referring to is the 501c3 tax-exemption status. 501c3 status is a coveted designation because it exempts a company from federal, sales, and property taxes. These exemptions are crucial to the function of non-profit organizations. 

IRS regulations do not allow LLCs to be assigned tax-exempt status directly. However, you may operate an LLC as a wholly owned subsidiary of a non-profit corporation.

We discuss how non-profit corporations can best use LLCs to reduce their liability risk. 

What Is a 501(c)3 Organization?

501(c)3 is an IRS code section that defines what qualifies as a tax exempt organization under federal law. To receive a tax determination letter from the IRS, approving the 501(c)3 status, a non-stock corporation must submit a Form 1023 or Form 1023-EZ application with the Internal Revenue Service (IRS). A corporation must meet specific requirements to be eligible for 501(c)3. To receive 501(c)3 public charity or private foundation status, specific language must be included in the non-stock corporation’s Certificate of Incorporation.

Purpose
Acceptable charitable purposes include religion, charity, education, science, literature, testing for public safety, or promoting animal welfare.

Non-Profit Corporations (501c3s) vs. LLCs

Non-profit corporations with tax exempt status (also known as 501c3 status) are incorporated as non-stock corporations. This is a type of legal entity that does not have any stockholders. 

Traditional LLCs have beneficial owners who hold an economic interest in the company. This characteristic of LLCs makes them ineligible for obtaining 501c3 exemption status.  

A non-profit corporation can still use an LLC to hold certain assets. To do this, the LLC must be a qualified subsidiary with the non-profit corporation being its sole member. The LLC’s management is permitted only to engage in activities approved by the parent non-profit corporation. 

The directors and officers of the non-profit corporation must also control the member managed LLC (See IRC Reg. 301.7701-3 et seq. as interpreted by Ann. 99-62 1999-43 I.R.B. 545). Thus, if you, Bob and Sue are the three directors of a non-profit corporation, you three must also manage the subsidiary LLC. 

The LLC’s Operating Agreement must specify that the LLC cannot violate the bylaws or restrictions of its member non-profit corporation. A subsidiary LLC cannot do something unless it is a permissible activity of the parent non-profit corporation.

How To Use a Subsidiary LLC for a Non Profit Corporation (501c3)

One way non-profits use subsidiary LLCs is as land-holding entities for real estate. This is especially common if the property is a brownfield with toxic contamination. Holding the property under an LLC keeps the non-profit corporation out of the chain of title. This can protect the corporation from superfund liability.

Non-profits corporations may operate service vans or other vehicles. A non-profit can title vehicles in the name of a subsidiary LLC in order to provide a degree of insulation for the corporation.

 For example, a breast cancer charity purchasing a mobile mammography van can set up an LLC subsidiary to hold title to the van. This can help protect the non-profit if the vehicle incurs any uninsured liabilities.

What Is A Low-Profit LLC?

Some states offer the L3C, which is a low-profit LLC. However, even these are not eligible for 501c3 status and have few practical purposes. Attorneys often advise clients to avoid the L3C because it only offers disadvantages compared to a traditional LLC. Members of an LLC can already agree to keep profits low in order to contribute to public benefit causes. Very few states have adopted low-profit LLC statutes.

How to Form a Non-Profit Corporation (501c3)

To create a Non-Profit that is 501c3 qualified, follow the following steps

1.  Form a non-stock corporation.
2. Complete IRS Form 1023 or IRS Form 1023EZ to apply for recognition of tax exemption status under section 501c3.
3. Obtain a tax determination letter from the IRS.

Once you receive the letter, your donors can deduct their contributions to your company as charitable contributions on their personal tax returns. Note that this can be done retroactively.

Can You Convert an LLC to a Nonprofit?

To become a non-profit in its own right, an LLC would first need to convert to a non-stock corporation. This involves the LLC members giving up their ownership interest before converting to remain eligible for 501c3 status. 

Owners are typically hesitant to forfeit their economic rights in an LLC. It is more common for LLC members who want to start a nonprofit to incorporate a new entity in the form of a non-stock corporation which has a nonprofit mission statement from its inception.

Why form a 501c3?

A 501(c)(3) provides not-for-profits with the tax relief that they are due based on the good they provide the community they are servicing. Without a 501(c)(3) tax exemption, the not-for-profit is defaulted to a taxable entity status and this will take away valuable funds from the cause that the not-for-profit is supporting.

Can a 501(c)(3) Be an LLC?

Only very recently has the IRS started allowing LLCs to apply for tax exempt status directly. The reason very few LLCs seek tax exempt status is because for an LLC to submit the IRS Form 1023 and obtain a tax determination letter from the LLC, the LLC must be structured in such a way as to mimic a non-stock corporation, such that the LLC’s members are non-equity owners. Plus the LLC must provide for a board of directors and officers, rather than just a manager or managing member. That complex structure may be the reason that it is so rare for LLCs to request and obtain tax exempt status directly.

Instead, more common is for an LLC to be a wholly owned subsidiary of a 501(c)(3) exempt corporation. The IRS has provided guidance to make it clear that if the LLC subsidiary is limited to the purposes of its parent and entirely controlled by its parent 501(c)(3) then the LLC would also be exempt under that umbrella without needing to apply to the IRS. One example of why a 501(c)(3) corporation would setup an LLC as a subsidiary is to take title to an asset that may have contingent liabilities, such as a vehicle or a piece of land with possible environmental contamination. That subsidiary structure helps keep the liabilities at the child level to avoid giving those possible creditors access to the assets of the parent company.

Do 501(c)3s Pay Taxes?

If a corporation receives 501(c)3 status from the IRS, it is considered tax-exempt and therefore is not required to pay taxes to the federal government on its exempt income. This status also incentivizes individuals to donate money to their cause because all charitable contributions donated to a 501(c)3 are tax-deductible for the donor.

MORE: How to Form a Non-Profit Corporation

The post Can I Form a Non-Profit LLC, 501c3? appeared first on IncNow.

Every year, there are new opportunities to grow your business. For many small business owners, now is the perfect time to consider forming a Limited Liability Company (LLC). The LLC has quickly become the most popular business structure for small business owners. According to the Delaware Division of Corporations, over 1.5 million LLCs are registered in Delaware alone as of 2024.

LLCs provide business owners with many significant benefits, from protecting their personal assets to potential tax savings. In this article, we give you 23 reasons why forming an LLC could be the smartest business move you make in 2023.

#1) Personal Asset Protection:

The primary reason why business owners form LLCs is to protect their personal assets. When you form an LLC, it establishes your business as a separate legal entity, which protects your personal assets – like your home, car, and personal bank accounts – from business-related debts and liabilities. Forming an LLC can keep the creditors of your business from reaching into your own pocket.

#2) Pass-Through Taxation:

The IRS treats LLCs as pass-through entities for federal tax purposes. Profits and losses pass through the business to the owners who report this information on their personal tax returns.

Pass-through taxation prevents the “double taxation” issue that some corporations experience, as it taxes profits only once, either at the corporate level or the shareholder level, but not both.

Pass-through taxation can help simplify business taxes for small business owners. According to the Tax Foundation, pass-through businesses, including LLCs, account for more than 60% of all business income in the U.S.

#3) Flexible Management:

LLCs allow for flexible management structures. As an LLC owner, you can choose to manage the company yourself, appoint a manager, or even have multiple managers. With an LLC, small business owners can tailor their company’s management structure to meet the needs of their business.

A study published by the Society for Human Resources Management suggests that businesses with flexible management structures are better equipped to respond to changing business environments and may experience higher levels of growth.

#4) Easy Formation Process:

Creating an LLC is a relatively simple and straightforward process. In most states, all you need to do is file an LLC formation document with the Secretary of State’s office and pay a filing fee. There is no requirement to complete complicated legal forms, making LLCs an attractive option for busy entrepreneurs and small business owners.

An online incorporation service, like IncNow, can complete the whole LLC formation process for you. They can also provide you with the necessary internal documents, like an LLC Operating Agreement, so that you can run your LLC properly. Delaware business lawyers prepare IncNow’s LLC Operating Agreements, and they come ready to sign.

#5) Credibility:

Forming an LLC can potentially give your business more credibility. Having “LLC” in your company’s name shows customers, vendors, and partners that you are serious about your business and have taken the necessary steps to protect it legally.

#6) Flexible Profit Distribution:

LLCs offer flexibility when it comes to distributing profits. In an LLC, Members can choose to distribute company profits in any way they prefer, while corporations typically require profit distribution based on the number of shares each shareholder owns. Flexible profit distribution can help small business owners implement more effective financial planning and facilitate growth.

#7) Scalability and Growth Potential:

An LLC is an ideal choice for businesses expecting growth and expansion.. It is easy to make changes in an LLC, like adding new members or adjusting ownership percentages. This flexibility can make it easier to adapt to changes in the business environment and accommodate future growth. According to the Tax Foundation, LLCs outpace corporations when it comes to net income.

#8) No Ownership Restrictions:

In comparison, U.S. corporations face some restrictions over who can have ownership in the company. For example, S-corporations have strict limits on the number of shareholders the company can have. In addition, non-US residents are not allowed to be shareholders in an S-corp.

#9) Increased Privacy:

Some state laws provide LLC owners with more privacy than others. For example, Delaware does not require any information about the Members or Managers of an LLC to be made public. Business owners find this level of privacy increasingly attractive as instances of fraud become more prevalent.

#10) Customizable Operating Agreements:

The LLC Operating Agreement outlines the roles, responsibilities, and decision-making processes within a Limited Liability Company. LLC Members can customize the Operating Agreement to best suit the needs of their business. A well-prepared LLC Operating Agreement provides Members with clarity on how the business is to be run and can help prevent business disputes.

#11) Establish a Business Credit Profile:

An LLC can obtain a DUNs number and establish its own business credit profile. A strong business credit profile can make it easier for a business to obtain loans and credit lines without relying solely on the owner’s personal credit. The Federal Reserve reports that small businesses with a strong credit profile are more likely to access financing and receive favorable loan terms.

#12) Continuity of Business:

An LLC has perpetual existence, meaning the business entity continues to exist even if the owner dies or leaves the business. Perpetual existence provides stability and continuity for an LLC, aiding its ongoing success. An article published by the George Washington Law Review found that businesses with a perpetual existence were more likely to experience long-term success by surviving economic downturns and better navigating ownership changes.

#13) Access to State Incentives and Grants:

Many states offer incentives and grants to businesses that operate as LLCs. These incentives can include tax breaks, access to financing programs, and other resources designed to support small businesses. By forming an LLC, you may be eligible for specific benefits meant to help your business grow.

#14) Easier Transfer of Ownership:

Transferring ownership in an LLC can be simpler than in other business structures. Members can join or leave an LLC by simply updating the company’s Operating Agreement. However, all LLC Members typically have to approve any transfer or sale of Membership interest.

Many LLC Operating Agreements include provisions, like Pick Your Partner or Right of First Refusal, that are meant to prevent unwanted individuals from buying their way into an LLC. The LLC Operating Agreement may give the company the right to buy back any membership interest before it can be offered to someone else. In addition, the remaining Members may be able to vote to reject an ownership sale.

#15) Less Ongoing Paperwork:

LLCs typically have less ongoing paperwork and administrative requirements than corporations. For example, Delaware does not require LLCs to hold an Annual Meeting or complete an Annual Report. This can save small business owners precious time and resources, allowing them to focus more on growing their business.

#16) Enhanced Collaboration Opportunities:

An LLC’s flexible ownership and management structure can make it easier to collaborate with other businesses, professionals, or entrepreneurs. This can lead to new partnerships, joint ventures, or other growth opportunities for your business.

#17) Easier Succession Planning:

LLCs make transferring ownership simple, which is an advantage when it comes to succession planning. The LLC Operating Agreement can outline the process for transferring ownership interests, making it easier to pass a business on to the owner’s heirs in the future. According to Harvard Business Review, businesses with clear succession plans are more likely to successfully navigate generational transitions and maintain long-term success.

#18) Simplified Annual Requirements:

In many states, LLCs have simpler annual reporting requirements compared to corporations. For example, in Delaware, LLCs only need to pay an annual fee in order to remain compliant. In contrast, Delaware corporations must hold an Annual Meeting of shareholders, file an Annual Report, and pay an annual Franchise Tax.

Maintaining an LLC is easy and can save you time and resources, allowing you to focus on running and growing your business instead of dealing with extensive paperwork.

#19) Better Business Record-Keeping:

Operating as an LLC can encourage better record-keeping practices, as there are certain legal requirements regarding the documentation and maintenance of business records. This can help you stay organized and make informed decisions about your business. Better record-keeping practices enable small business owners to accurately assess their financial health and make better-informed decisions for the business.

#20) Legal Compliance:

Forming an LLC ensures that your business is operating in compliance with state laws and regulations. This can help you avoid potential legal issues and protect your business in the long run.

#21) Flexible Tax Treatment:

The IRS enables business owners to select the taxation method for their LLC based on the most beneficial structure for their business. The IRS “Check-The-Box” provisions let LLCs to choose whether they prefer S-corporation or C-corporation treatment for federal tax purposes.

LLCs are taxed as pass-through entities by default. However, LLC Members can choose to make a different tax election that is more advantageous to the company’s current situation. For example, an LLC can select S-corp or C-corp treatment for federal tax purposes by completing a straightforward tax election form.

IncNow LLC Tax Tips

This flexibility allows LLC owners to select the tax treatment that best suits their business needs and financial goals. Businesses with flexible tax treatment options are able to better optimize their tax strategies and reduce their overall tax burden.

#22) Branding Opportunities:

Incorporating “LLC” into your business name can provide additional branding opportunities, leading to increased customer trust and loyalty. A strong brand identity is important for any business that is looking to attract and retain new customers to achieve higher growth and revenue.

#23) Limited Liability for Members:

As the name suggests, an LLC provides its Members and Managers with limited liability protection. This means Member’s personal assets are generally protected from business debts and liabilities. Limited liability provides business owners with the protection and peace of mind that they need to commit to growing their business.

From personal asset protection and tax advantages to management flexibility and scalability, there are many reasons to consider forming an LLC for your business. By understanding the advantages of an LLC structure, you can make an informed decision about what’s best for your business and set yourself up for success in 2023 and beyond.

What is the Best State to Form an LLC?

Legal professionals and savvy entrepreneurs consider Delaware to be the best state to form an LLC. Delaware’s well developed business laws and dedicated business court are known for providing LLCs and their owners with the strongest legal protections anywhere in the world.

Top 5 Benefits of Forming a Delaware LLC

There are numerous benefits to forming an LLC in Delaware. Here are five of the most important benefits for small business owners.

Benefit #1: Versatility

Delaware LLCs are versatile and work well for many types of business. From solo consulting ventures to multi-million-dollar properties, small time entrepreneurs and large conglomerates alike use Delaware LLCs for a variety of business purposes. Delaware LLCs are ideal for safeguarding tangible assets like real estate, as well as intangible assets like intellectual property or trademarks.

Benefit #2: Accessibility

Almost anyone (excluding individuals from certain restricted countries) can establish a Delaware LLC without living in or visiting the state. There is no residency requirement to open a Delaware LLC. All you need is to appoint a Delaware registered agent to represent your company. Delaware LLCs are widely recognized and can do business in any state or country.

Benefit #3: Low Startup Cost

Delaware has some of the lowest filing fees for LLCs. IncNow’s Delaware LLC packages start at just $9 plus state fees.

Benefit #4: Business Friendly Legal Environment

Delaware has a separate court, the Court of Chancery, dedicated to resolving business disputes. Judges in the Court of Chancery are experts in business law and are known for settling disputes efficiently and fairly.

Benefit #5: Privacy for Owners

Delaware does not require LLC owners’ names or addresses to be displayed on the state’s public database. The formation document for a Delaware LLC only needs to include the name and address of the company’s Delaware registered agent.

When to Form a Corporation

Incorporating a corporation, as opposed to forming an LLC, depends on several factors related to your business plans. While Delaware law makes it relatively easy to convert from an LLC to a corporation if you need that form in the future, here are three key considerations where you may want to start with a corporation from the outset:

1. Raising capital from outside sources can be accomplished with an LLC, but it is a but more investor friendly to use a corporation because the default laws for corporations have more built-in protections for investors. For example shareholders can more easily transfer their shares to other investors, in the absence of a shareholder agreement. Also corporations have certain fiduciary duties that are un-waivable, like the duty of loyalty, to better protect investors from self-dealing managers.

2. Every corporation has a board of directors that run the company. This is not typically found in an LLC, which usually just has members and managers.

3.Corporations are often used by high growth startups that anticipate multiple rounds of investment from an angel inventor round to the A-round and B-round. Many different types of venture capitalists and institutional investors are more comfortable investing in the corporate form.

You should consider forming a corporation when your business is: experiencing significant growth, planning to raise capital through stock issuance (where you should consult with a lawyer with securities law experience to avoid early regulatory problems), and comfortable naming individuals to the board of directors and is not merely wholly owned by a larger holding company.

If you do not plan to raise capital right away, many businesses start with a small number of authorized shares of just one common class. This is “going private before you go public.” You can always amend the number of shares later when needed for a round in investments. Starting with a small number of authorized shares, like 1500 shares, can also avoid a large franchise tax bill early on, when you are not yet in full swing.

The post 23 Reasons to Form an LLC in 2025 appeared first on IncNow.

One of the best decisions that a new business owner can make is to incorporate their business. But with so many business entity types and legal jargon, incorporating your business can be overwhelming and confusing. If you are a first-time business owner, you may be asking questions like:

• What does LLC stand for?
• What does Inc., or Co. mean?
• What is an LLC and how does it work?
• What is a partnership, and how are they different?

In this article, we breakdown all of the corporate endings out there. Consider this your complete guide on legal business entity types and terms.

What Does “Incorporation” Mean, Exactly?

“Incorporation” is the process that many business owners go through to legally separate themselves from their business and protect their personal assets. Incorporating a business means filing documents in a state to turn the business into a legal entity. Most businesses incorporate as either a corporation or a limited liability company (LLC).

” Incorporating a business means filing documents in a state to turn the business into a legal entity.”

By incorporating a company, a business takes on a legal life of its own. An incorporated business has its own assets, financial obligations, and legal liabilities.

The owners of an incorporated business receive limited liability protection for their personal assets. Things like cars, homes or personal bank accounts are protected from claims made by the business’s creditors, or any lawsuits against the business.

MORE: Why Incorporate in Delaware?

What Is Limited Liability?

In business, limited liability means that the owners of a company are not personally responsible for the debts and other liabilities of the business.

If a business owner has limited liability, then a creditor of the business cannot go after the business owner personally to settle claims against the business. With limited liability protection, a business owner can only lose the amount of money that they chose to invest in the business. If the company faces a lawsuit, the business owner is also protected legally.

Limited liability protection benefits business owners operating businesses of all sizes. Whether you run a small storefront or a large real estate company, you need limited liability protection to protect yourself from personal risk.

“Limited liability means that the owners of a company are not personally responsible for the debts and other liabilities of the business.”

Corporations and LLCs are two types of legal business entities that provide limited liability protection for their owners. Limited liability allows business owners to take risks in hopes of growing their business without risking their personal financial health or well being.

What Is a Limited Liability Company ( LLC)

A “Limited Liability Company” (LLC) is a type of business entity that safeguards its owners (known as “Members”) with liability protection. The state laws where the LLC is registered enforce these protections.

Members of an LLC benefit from liability protection that keeps their personal assets, like homes, secure even if the business faces debt or other financial obligations. Simply put, their risk is limited to the amount they’ve invested in the business.

LLCs are an excellent choice for small business owners looking to grow while preserving personal financial security. However, LLCs are used by a wide range of businesses, from one person consulting firms, to large investment funds.

MORE: What Is an LLC and How Can It Protect My Business

What Is a Corporation?

A corporation is a type of legal business entity that exists completely separate from its owners, managers and employees.

The owners of a corporation are called “stockholders”. Stockholders typically invest money to help start the business and hold an economic interest in the company.

Most corporations are structured as “general corporations”. A general corporation has a three-tier structure that works like this:

Tier 1.) Stockholders:

A corporation’s stockholders have ownership in the company and often invest money to get the business started. A corporation’s stockholders choose people to be part of the company’s board of directors.

Tier 2.) Directors:

The directors are the captains of a corporation and are in charge of keeping the company on course. Directors are elected by the corporation’s stockholders and are tasked with making major strategic decisions for the business.

A corporation’s board of directors will meet multiple times within a year to vote on specific business decisions and elect the company’s Officers. State incorporation laws require a company’s board of directors to hold one Annual Meeting each year.

“A general corporation has three-tiers: Stockholders, Directors and Officers.”

Tier 3.) Officers:

Officers in a corporation are in charge of running the company’s day-to-day business operations. Officers have titles like “President”, “Treasurer”, or “Secretary”. The corporation’s board of directors are in charge of hiring and firing the officers.

What Is Inc.?

If the name of a business ends with “Inc.”, you know that the company is set up as a corporation. State laws require corporations to include a corporate ending in their business name. The most popular corporate endings include:

• Inc. (short for “incorporated”)
• Co. (short for “company”)
• Corp. (short for “corporation”)
• Ltd. (short for “limited”)

Corporate endings are important because they signal to other businesses and the general public that the owners of a particular business have limited liability.

Is “Inc.” Different From “Corp.”?

“Inc.” and “Corp.” are both corporate endings and mean the same thing. A corporation can choose to include either “Inc.” or “Corp.” at the end of its name to comply with state laws. It is a matter of preference.

What Is a Close Corporation?

A “close corporation” is similar to a general corporation, but is not required to have a board of directors. Close corporations are legal business entities that provide limited liability protection for their owners. State laws may limit the number of stockholders that a close corporation can have.

Family businesses have historically been the primary users of close corporations, which are not as popular as general corporations.

What is an S-Corp?

An S-Corporation (S-Corp) is a federal tax election. It is a pass-through that automatically flows through all profits and losses to its owners every calendar year. Each general corporation starts by default as being taxed as a C-Corporation (C-Corp). Within 75 days of incorporation or within 75 days of subsequent calendar years, a corporation may make the S-election on IRS Form 2553. In fact, even an LLC can make an S-Corp tax election. Instead of the C-Corp with a second layer of corporation income tax, the profits and losses are passed through directly to the shareholders’ personal tax returns on Schedule K-1.

Aside from avoiding double taxation of a C-Corp, the S-Corp tax election also allows income to be split 50/50 between salary (subject to self-employment FICA taxes) and S-Dividend (not subject to self-employment FICA taxes). Therefore, an S-election can lower the effective tax rate. Compared to either a C-Corp of an LLC taxed as a sole proprietorship or partnership. An LLC can also file IRS Form 2553 election to be taxed like an S-Corp on Form 1120-S Tax Return.

What is a C-Corp?

A C-Corp is a reference to how a general corporation is taxed by default. C-Corp is not a reference to a state law entity. Some corporations may prefer to have their corporation taxed as a C-Corp due to some advantages of C-Corps and limitations on S-Corps. Some C-Corp advantages include the ability to accumulate net operating losses within the corporation to offset profits in future years. This may be an advantage when a business has more losses than its owners can use personally to offset other profits. The C-Corp can elect a fiscal year different from the calendar year.

Many corporations also are not eligible for the S-Corp election, which requires all owners to be U.S. citizens, with a cap on the maximum number of shareholders. Plus the S-Corp requires only one class of owners. LLCs can also file IRS Form 8832 electing to be taxed like a C-Corp on Form 1120 Tax Return.

What Is a Delaware Public Benefit Corporation?

Some states, like Delaware, allow businesses to form a Public Benefit Corporation (PBC). A Delaware Public Benefit Corporation is like a general corporation that has a bigger purpose than just maximizing profits. By incorporating as a Delaware Public Benefit Corporation, a business can hold itself accountable for practicing social-responsibility and helping its surrounding communities.

The board of directors in a Delaware Public Benefit Corporation is responsible for advancing the company’s stated public benefit interest when making business decisions. In Delaware, a Public Benefit Corporation must state its public benefit purpose in the company’s publicly filed incorporation document.

“A Delaware Public Benefit Corporation is like a general corporation that has a bigger purpose than just maximizing profits.”

The board of directors of a Delaware Public Benefit Corporation is required to provide the company’s stockholders with a statement of the company’s progress towards its stated public benefit goals. The Delaware law requires the board of directors to make the public benefit statement at least every two years.

What Is a Non-Profit Corporation?

People often use “Non-profit corporation” to refer to an organization with 501(c)(3) tax exempt status from the IRS. These organizations typically include public charities or private foundations.

501(c)(3) tax exempt organizations can accept donations that are tax deductible to their donors. Non-profit organizations with 501(c)(3) status are often incorporated as “non-stock corporations”. Like the name suggests, a non-stock corporation is a type of corporation that does not have any stockholders.

The owners in a non-stock corporation cannot benefit economically from the company’s activities. This aspect of non-stock corporations is what allows these types of companies to qualify for 501(c)(3) tax exempt status.

Types of Partnerships: GPs, LPS, LLPs and LLLPs

Some businesses operate as partnerships. Here is a breakdown of the different types of partnerships.

What Is a General Partnership (GP)?

A general partnership (GP) describes two or more individuals that agree to share responsibilities and profits in a business. Starting a general partnership does not require submitting any paperwork. Once a pair of partners start running a business together, they are in a general partnership.

A general partnership does not provide limited liability protection for anyone involved in the business. Each partner is jointly and separately responsible for all of the partners’ actions.

What Is a Limited Partnership (LP)? 

A limited partnership (LP) is made up of two parts:

• The active managers, called “general partners”; and,
• Passive investors, called “limited partners”.

The general partner in a limited partnership does not have any personal liability protection and is completely responsible for running. The limited partners have limited liability and can only lose the money that they invest in the business.

Private equity or venture capital firms often use limited partnerships. In these business structures, the limited partners are individuals or institutional investors that provide the firm with capital. The private equity or venture capital firm serves as the general partner and actively manages the investments into companies.

Limited partnerships can help people make investments without taking on too much personal risk. At the same time, it allows other people (the general partner) to run the business without having to put in all of the capital.

What Is a Limited Liability Partnership (LLP)?

Professionals like lawyers, doctors, and accountants typically use limited liability partnerships (LLP). In an LLP, the law protects business partners from the actions of one another. However, an LLP does not protect you from your own negligence.

What Is a Limited Liability Limited Partnership (LLLP)?

A limited liability limited partnership (LLLP) provides limited liability to all the partners. LLLPs are similar to LLCs, but more complicated to set-up and operate. Limited liability limited partnerships are not popular and not many states recognize them.

LLC Types and Management Structures

Some states allow businesses to form different types of LLCs that provide unique benefits. There are also multiple ways that an LLC can be structured.

What Is a Series LLC?

Some states, including Delaware, allow business owners to form a Series LLC. A Delaware Series LLC allows business owners to operate multiple business lines and protect assets across businesses all under one umbrella.

A Delaware Series LLC is able to create an unlimited number of separate business units, called “protected series”. Each protected series provides limited liability protection for its owners, and protected series have protection from one another.

Delaware Series LLCs allow entrepreneurs to benefit from the protections of forming multiple LLCs with less hassle and less filing fees.

MORE: Grow Your Business With a Series LLC

 What Is a Single-Member LLC?

A “Single-Member LLC” is an LLC with just one owner. The structure of a Single-Member LLC is generally the same as an LLC with multiple members, or a “Multi-Member LLC”. In a Single-Member LLC, the sole member is often also the manager of the company.

A Multi-Member LLC may choose only one of the members to be the manager, or hire a third-party manager who does not have any ownership in the company.

What Is a Member-Managed LLC?

In a Member-Managed LLC, the LLC members wear two hats. Not only do they own part of the LLC, but they also handle the day-to-day operations of the business.

What Is a Manager-Managed LLC?

In a Manager-Managed LLC, the LLC members hire a manager to handle the everyday tasks of the business. The manager is typically a skilled professional. The LLC Operating Agreement should make it clear what the manager is allowed to do and what rights the LLC members still have in the company.

MORE: How to Structure an LLC: Member-Managed vs. Manager-Managed

What Is a Statutory Trust?

You might have heard about “Statutory Trusts,” which used to be called “Business Trusts.” Statutory Trusts work a lot like regular trusts with people who give benefits (beneficiaries) and people who manage the trust (trustees). These trusts are flexible and follow a Trust Agreement. But, they might not be the best choice for most businesses because they need a Trustee who is based in Delaware.

What Is a Holding Company?

A Holding Company is a ‘parent company’ that owns one or more daughter companies which are wholly-owned subsidiaries. The parent company is not often involved in daily operations of the subsidiaries. A big benefit of using a holding company is adding a second layer of asset protection, one step removed from business operations. Parent companies held by multiple people can also simplify tax filings, because the single member LLC subsidiaries are disregarded entities for tax purposes, where profits and losses all flow-up to the Holding Company partnership consolidated tax return.

What Is a Registered Agent?

A Registered Agent’s primary purpose is to receive service of process lawsuits on behalf of your company. The Registered Agent then must forward that notice to their communication contact person on a timely basis. The Registered Agent is a physical (not virtual) office open during business hours where a sheriff or private process server can deliver legal notices located in the state of incorporation. For a company that also files Certificates of Authority to do business in other states, that company must also have a Registered Agent in each additional state where it is qualified to do business. Having a Registered Agent is a legal requirement of each state. If you live in the business’ home state, you can act as your own Registered Agent, otherwise business owners appoint a Registered Agent such as IncNow.

Registered Agents often offer additional corporate services that help you maintain your business and its good standing with the state.

The post What Does LLC, Inc., Co., Corp., and Ltd. Mean? Complete Incorporation Guide appeared first on IncNow.

The process of incorporating can come with a lot of new questions, especially if you’ve never done this before. One of them is corporation vs. incorporation, and how they differ, as well as the difference between Inc. and Corp. We’re always happy to share our knowledge to help people when it comes to incorporating. Here are a few of the most common questions:

Q: What is the difference between a corporation and incorporation?

A: A “corporation” is the business entity itself. “Incorporation” is the act of starting a corporate business entity.

A corporation (Inc.), a limited partnership (LP), and a non-profit (non-stock) corporation are incorporated entities. This means they have filed their corporate charter, the founding document, with the state of incorporation. They have tiers of ownership and management that are defined by statute. Corporations file annual reports with the state of incorporation.

Limited liability companies (LLCs) and Series LLCs are examples of unincorporated entities.  The contract between owners and managers, called the Operating Agreement, governs these types of entities. LLCs offer a higher degree of freedom in regard to management and how the owners choose to have the company taxed.

Q: What does it mean when a company is incorporated?

A: Incorporation means the company has become a legal entity.

Businesses incorporate to separate the assets and liabilities of their business from that of their owners. When a business is incorporated, that means it has filed the necessary paperwork with the state division of corporations to become a corporation.

Q: OK, what’s the difference between inc vs. corp?

A: It’s the same thing.

Inc. and corp. are different suffixes you can choose when naming your corporation. Inc. is the most common, but ultimately it is up to you.

Q: How do I form an LLC?

A: Contact a registered agent.

Forming an LLC is a fairly simple process. Once you have chosen a name for your company that ends in LLC, L.L.C. or Limited Liability Company, contact a registered agent like IncNow. You only have to fill out a simple online form to start the process. The registered agent will file the necessary paperwork to form your LLC and forward correspondence from the state for an ongoing fee. The registered agent will forward you the company’s Certificate of Formation once the state approves and files it.

Q: Do I need to incorporate twice?

A: No. You only incorporate once. You just go on-record elsewhere you do business.

Many people incorporate in one state and have their principle place of business in another state.  All 49 other states must accept for example a Delaware LLC and let it do business. However, they may also require it to go on-record in their state.  Many shop around for the best state in which to incorporate and come to Delaware. The advantage of this is that the state of incorporation’s laws will govern the internal affairs of the company (over less business-friendly laws in the state where you happen to be living/working).

After incorporating in Delaware, you should determine whether you also need to file for a Certificate of Authority in the state of your principle place of business.  This is known as “qualification” to register this “foreign” company. “Foreign” is a term meaning “out-of-state” not “international”. This is done in the state of the principle place of business and any other states where the company has an office.  Every state has different laws regarding the level of activity needed before it requires qualification.

Q: Can a company incorporate in multiple states?

A: No, you should only incorporate in one state.

Some business owners confuse foreign qualification with forming an entity in each state they do business. While business often do form multiple entities if they have subsidiaries, it is not advisable to form separate entities for one business. It creates issues with choice of law, which entity holds the companies assets, and uncertainty if there are discrepancies between each entities governing documents. It also would create unnecessary filing and maintenance costs for the business.

Take advantage of the freedom of being able to choose the laws of the state that govern your internal business structure. Forming a redundant entity in your home state or in each state you do business is not a well-advised strategy.

Q: How many people do you need to incorporate?

A: At least one.

The simple answer is at least one. The individual who owns a company is referred to as the Legal Party. In a corporation this individual is called a shareholder or stockholder. In an LLC this individual is considered a member. The legal party who starts a company can act as the sole director, officer, and shareholder of a corporation, or, the sole member of an LLC. When there is only one member in an LLC this creates a single-member LLC, known as a Disregarded Entity for tax purposes or a “DRE”. For purposes of starting your company, you only need yourself.

Q: How much does it cost to incorporate?

A: The fee will vary based on what state you choose to incorporate in.

Every state has their own fee schedule when it comes to doing business in their particular jurisdiction. The fee will also vary based on whether you are starting an LLC or a Corporation and how quickly you would like to establish your new company. In Delaware, for example, the Certificate you file to create a corporation has a nominal fee of $109 and the LLC has a nominal fee of $110.

Q: Why do they say “foreign” when I am still in the United States? What’s my principal place of business?

A: It’s just a word. As for the Principal Place of Business (“PPB” for short), there is a test for that.

The state where you incorporate is called the “domestic” state and the other 49 states are called “foreign” states.  You should not make the mistake of “re-incorporating” in the other states by filing another certificate of formation or articles of organization. That would result in having multiple companies by the same name and be a big mistake.  Instead you go “on-record” as for example a Delaware LLC doing business in Louisiana.  Where is your principal place of business?  In this example, Louisiana would be known as the “foreign” state where you have offices that do everything, so it is easy.

Other times, businesses have multiple locations. In those instances, one must look at where the executives make decisions (the “nerve center”) and where the activities are conducted (the “muscle center”) to determine where is your principal place of business.  The overall balancing of this two-prong approach is the “total activities test”.  Every company has one principal place of business. Generally, you need to go on record there. This is so if there is a problem, the injured or aggrieved parties know where to serve you with official papers. This is a matter of public policy and you should comply with this state law requirement and evaluate where you should go on record with a certificate of authority.

We cannot tell you whether your home state requires you to go on record. That is a legal opinion. IncNow is a filing service, not a law firm. You may want to contact legal counsel in your home state or make the decision for yourself after reviewing the laws in your home state. To avoid this trouble, you can play it safe and just go on record. If you are wondering what the penalty is for not going on record, that too is a matter of state law. We have heard some states, like New York, only charge a $50 fine plus require you pay the costs to qualify. Other states may have different rules which are not as forgiving.

Q: What is the legal theory behind this requirement?

A: It’s all about official, physical presence.

What is the purpose of this? Is this just another way for your home state to make money?  It’s more a matter of official records where the public can find your business.  In law school, there is a class known as Civil Procedure. In that class, one learns that a company is subject to “general jurisdiction” in both the state of incorporation and in the principal place of business.  Therefore the courts of those two states have jurisdiction over your business over anything under the sun, no matter where the controversy arose, if the plaintiff chooses to file in those states.

In other states usually you are only subject to “specific jurisdiction” over the activities which were conducted in those states. This prevents “forum shopping” to the most plaintiff friendly states.  In order to let people know how to get in touch with you in the states where you have general jurisdiction, you must have a physical presence on public record in both states. This could be your headquarters office, or it could be a registered agent’s office (like Agents and Corporations, Inc.) This filing allows people to look-up your company name with the secretary of state and locate an address where to serve your company legal papers within the boundaries of the state.

Q: Let’s cut to the chase, do I need to qualify? Please help.

A:  We look forward to assisting you.

How do you know if you need to register in the state of your principle place of business?  Most  states define the terms “doing business” as having a “brick and mortar” location there,  employees, holding and or shipping products or inventory,  holding specific licensing to that state or holding real property.  In some states, banks may also request the qualification in order to open the bank account for the company in the state of the principle place of business.  Sometimes micro-businesses that are one person activities are no required to file the certificate of authority.  Also sometimes you need to qualify in other states in which you are conducting business.

Each state has its own laws on whether your company’s level of activity is great enough to have to go on record.  Generally you do not need to qualify if the only contacts with other states is selling products, advertising, hiring sub-contractors as sales-people or selling services, provided you do not have an office or employees in that state.

Q: What are the mechanics?

A: We can help and make it easy.

The process of qualification in most states will require a short application, a fee, plus either a Good Standing Certificate or Certified Copy of the formation certificate.  The forms vary from state to state as far as the required information.  Agents and Corporations, Inc. offers the service of qualification for all 50 states. Your registration is handled by professionals who have the experience to gain approval in a timely fashion without guess work.  At your request, we will quote you our processing fee, the state fee and cost of the required documents.  You need to name an agent with a street address in the state of qualification. The certificate of authority is the document obtained once the process is completed and approved.

For many; incorporation is the first step and qualification is the next step toward finalizing their business filing.  Agents and Corporations, Inc., is happy to provide professional services to accommodate these and other business necessities.

Q: When should you use ‘incorporated’ and ‘corporation’?

To start a Corporation, the Certificate of Incorporation must include a permissible Corporate indicator in the name of the Corporation. Incorporated, often shortened to ‘Inc.’, is the most commonly used ending. Not every state has the same list of permitted Corporate endings, but the ones all states have include ‘Corporation’, ‘Corp.’, ‘Company’, and ‘Co.’.

Q: Can anyone incorporate in Delaware?

A: Yes.

Yes, almost anyone can incorporate in Delaware and IncNow assists customers from all 50 states and over 100 countries. The federal government does place restrictions on doing any business with individuals and countries listed with the U.S. Treasury’s Office of Foreign Assets Control (“OFAC”). People who are “Specially Designated Nationals” or associated with certain sanctioned countries are not allowed to do business in the U.S. This SDN list is a database of individuals and entities that are banned from certain business activities within the United States.

MORE: What You Need to Know About Delaware Foreign Qualification

 You can take the LLC out of Delaware, but you cannot take the Delaware out of the LLC.

*(unless there is a merger or a conversion, but we’ll save that for another post.)

Why Incorporate in Delaware? Find out more here.

The post “What’s the Difference Between Corporation and Incorporation?” and Other Common Incorporating Questions appeared first on IncNow.

If you want to do business using an LLC, you will need to open a business bank account. Having a separate bank account for your LLC is required to protect your personal assets from business liabilities. Savvy entrepreneurs know they should never mix personal funds and accounts with company assets, so it’s important to know how to open a bank account for an LLC.

The process for opening a business bank account  can differ depending on which bank you are using and even the branch you go to. Non-US residents will also have to make some additional considerations when opening a bank account for an LLC.

Here we cover how an LLC can open a bank account and what documents may be required.

 How To Open a Business Bank Account for an LLC

The process for opening a business bank account for an LLC is not completely standard. Banking laws differ in each state, and separate banks have different policies for opening business accounts. Policies can even differ between separate branches of the same bank. Some branch managers understand LLCs better than others and may require varying amounts of documentation.

Although policies differ between banks, the following steps are generally required to open a business bank account for an LLC:

Step 1.) Form an LLC

Opening a business bank account starts with forming a business entity, like an LLC. Many business owners prefer LLCs because they are easy to both setup and manage.

Forming an LLC requires filing a formation document with the Secretary of State’s office. This document has different names in different states. Delaware, one of the most popular states for forming LLCs, calls the formation document a “Certificate of Formation”. Other states call the LLC formation document the “Articles of Organization”.

A Delaware Certification of Formation requires the name of the company as well as the name and address of the company’s registered agent.

Step 2.) Obtain an EIN Number

An LLC needs to obtain an EIN number from the IRS in order to open a business bank account. LLC Members must provide the bank with a copy of either the EIN Confirmation Letter (575 CP) or an EIN Verification Letter (147C) from the IRS in order to open the account. Federal law now requires even single member LLCs to obtain an EIN number.

An EIN, or “Employer Identification Number”, is the type of federal tax identification number assigned by the IRS to businesses, estates or trusts. An EIN number works like a social security number for a business entity and allows LLCs to pay federal taxes, do payroll and open bank accounts.

LLC owners can obtain an EIN number by submitting the Form SS-4 to the IRS either online, through the mail, or via fax. You do not have to submit the Form SS-4 on your own. Service providers, like IncNow, can submit the SS-4 application to the IRS and obtain an EIN for your LLC. Note that you should not obtain an EIN for an LLC until after the LLC is formed.

Step 3.) Provide Necessary Documents

A bank will require some supporting documentation in order to open an account for an LLC. Banks require proof that:

A.) The LLC legally exists; and,

B.) The individuals trying to open the account are authorized to act on the LLC’s behalf.

Banks typically require the following documents to open a business account for an LLC:

• The LLC Operating Agreement

Most banks will want to see a signed copy of the LLC Operating Agreement in order to open a business account. The LLC Operating Agreement lists the owners and managers of the LLC.

• Certificate of Good Standing

A Certificate of Good Standing is an official document that an LLC can obtain from the Secretary of State in its state of formation. Some states also call this document a “Certificate of Existence”. The Certificate provides proof that;

A.) The LLC legally exists; and,

B.) The LLC has paid its franchise tax balance and is compliant within its state of formation.

If you have a Delaware LLC, you can obtain a Certificate of Good Standing through a registered agent, such as IncNow.

• Statement of Organizer

In some instances, a bank may require additional documentation showing that the people listed in the Operating Agreement are actually connected to the LLC. One option is to provide a Statement of Organizer.

A Statement of Organizer is a corporate document stating that an Authorized Person requested the LLC to be formed while acting as a representative for the company’s initial Members. A Statement of Organizer can help certify who the initial Members of an LLC are intended to be at the time the company is formed.

• Other Public Filings

Some banks outside the United States may find that internal company documents are not enough to prove ownership in an LLC. In this case, a bank may request a copy of an official public filing stating the names of the LLC’s owners.

Some LLCs can simply provide the bank with a copy of the company’s formation document filed with the Secretary of State. Many states require LLCs to include the names of the company’s Members and Managers in the public formation document.

This can be problematic for Delaware LLCs however. Delaware does not require the names of LLC Members to appear on the company’s Certificate of Formation. Most Delaware LLC owners take advantage of this and protect their privacy by not including their names on the formation document.

Delaware LLC Members can file an amendment to the LLC’s Certificate of Formation with the Delaware Secretary of State to include an article providing the names of the company’s owners. Amending the Certificate of Formation creates an official public record of an LLC’s Membership that should satisfy almost any bank.

What is an LLC Bank Account? 

An LLC bank account is a business bank account opened specifically for a Limited Liability Company (LLC). Opening a separate bank account is an important part of setting up a business as an LLC. 

Business bank accounts provide many benefits for LLCs and its Members. The primary benefit of an LLC bank account is the liability protection it offers. LLC Members need to make sure that they are not mixing personal and business finances in order to maintain their limited liability shield in the company. Opening a separate bank account for an LLC can make it easier to avoid commingling funds between a business and owners. 

Opening an LLC bank account can also assist with accounting. Having a separate business account can make it easier to track any expenses, deposits and transfers related to a business. This clarity will help during tax time, and is crucial if the company needs to complete a financial audit. 

LLC bank accounts may come with certain features that personal accounts don’t. These may include higher transaction limits, merchant services, business credit cards and more. These benefits can help give your company’s finances a boost depending on what kind of business you are in. 

Do I Need to Open a Business Bank Account for My LLC?

Yes, you should always open a separate business bank account for your LLC. An LLC does not need its own bank account to conduct business. However, keeping business finances separate from your personal bank accounts is an important part of operating an LLC the right way.

The point of forming an LLC is to legally separate yourself from your business to protect you from being personally responsible for any debts or obligations incurred by the company. These legal protections are called “limited liability protection”.

You can lose your limited liability protection if you start mixing business income and expenses into your personal finances. The best way to legally protect yourself and your business is to open separate business bank accounts for your LLC.

What Should I Use My LLC Bank Account For?

It is important to remember that an LLC bank account should only be used for depositing business income and paying business expenses. Your personal finances should be completely separated from any bank accounts associated with your LLC.

Mixing personal finances with business bank accounts is called “commingling”. If LLC owners or Managers are found to be commingling business assets or funds with personal bank accounts, the whole company could lose its legal protections. This puts the LLC Members at risk of being held personally responsible for the company’s legal liabilities and financial obligations.

A business owner can pay themselves through either a salary and bonuses with payroll deductions or through simply withdrawing LLC funds as an owner’s draw. Either way, all of these will be subject to self-employment taxes. To reduce self-employment tax in half, most LLC owners are eligible to file an IRS Form 2553 to have their LLC classified as an S-Corporation for tax purposes. Then, the owner’s income can be split 50 / 50 between salary and S-Dividend (not subject to self-employment FICA taxes like Medicaid and social security contributions).

Where Can I Find My EIN Number?

The first place to look for your company’s EIN number is the original EIN Confirmation Letter. You can also find your EIN number recorded on numerous company documents and records. These include:

• Old federal tax returns,
• Business bank account statements,
• Official IRS tax notices,
• Business license, permits, or other applications.

If you cannot find your EIN number on any relevant documents, you can call the IRS and request an EIN Verification Letter.

Keep in mind that you will need access to a fax machine in order to receive an EIN Verification Letter. The IRS can provide you with the Verification Letter right away, however, they can only send it through fax.

Do I Need a DBA to Open an LLC Bank Account?

An LLC does not need a DBA to open a business bank account. Bank representatives who are unfamiliar with LLCs may think that the company needs a DBA to open an account. This is not the case.

A DBA stands for “Doing Business As”. A DBA is an alternative name that an LLC can use for business purposes other than its official corporate name. DBAs are also referred to as “fictitious names” or “trade names”. For example, Agents and Corporations, Inc. trades under the name “IncNow”. An LLC can acquire a DBA by filing a document at the county level in its state of formation.

Can A Non-US Resident Open an LLC Bank Account?

Individuals from almost any country in the world (except restricted countries and individuals on prohibited lists) can form an LLC in the United States. Non-US residents who form LLCs likely need to visit the US in order to open a business bank account. Non-US individuals often decide to open a business bank account in the state where the LLC is formed.

Regardless of where you do business, you will find having a bank account for your LLC to be essential. Once your company is formed, you can obtain documents later that your bank requests if you do not have them at the time of formation.

What LLC Documents Do I Need to Open a Business Bank Account?

Your business will need to open a bank account to conduct business. Beyond the Certificate of Formation which is filed with the state of formation, the banks will require your operating agreement and an EIN. The Employer Identification Number (EIN) can be obtained directly from the IRS, or through IncNow’s EIN service. Under the US Patriot Act, banks also need to comply with Know Your Customers (KYC) laws. Therefore banks require a list of the LLC’s owners and managers including their driver’s license or passport. Often when your bank branch is not located in the state where your company was formed, banks may request that the LLC submit a Certificate of Authority to qualify as a foreign entity in the state where the business has its operating headquarters. One thing to be aware of is that if you open an LLC in Delaware and decide to open the bank account from a branch in Delaware, then Delaware law will govern that bank account. This can be advantageous because Delaware is the only state in the country where a business creditor cannot garnish funds in the business’s bank account to collect on a judgment. (10 Del.C. § 3502).

Do I Need to Open a Bank Account for an LLC in Person?

Typically, United States residents must open a bank account for an LLC in person to satisfy the Know Your Customer laws and Patriot Act. If you want to open a Delaware bank account without visiting Delaware, it may be possible to visit a branch of the same bank that is local to you or your business to confirm your identity. Non-U.S. residents should contact their local bank to see if it has a correspondent bank in the U.S. to assist.

What Happens After I Open a Bank Account for an LLC?

After you open a bank account for an LLC, you must implement proper accounting procedures for tracking all money coming in and going out of the business account. Keeping thorough records of all business transactions will make tax season simpler and will further separate personal assets from business liabilities. Commingling personal expenses and assets with business assets could result in loss of liability protection for disregarding formalities.

NEXT –> How To Save On Single Member LLC Taxes

The post How to Open a Bank Account for an LLC appeared first on IncNow.

“The only ship that doesn’t float is a partnership”. This is common when consulting entrepreneurs who are considering bringing on a business partner. While a general partnership is the oldest business organization, it is the worst choice possible. This is because general partnerships are laden with traps that could easily end in financial ruin for all involved. A Limited Partnership is a better form of organization for protecting investors.

So, why was the limited partnership law developed to protect investors, and how do you avoid being considered a general partnership?

What Is a General Partnership?

A general partnership is formed through implied conduct. This is when two or more individuals agree, either orally or in writing, to engage in business towards a common goal. A general partnership commences upon performance of even preliminary tasks to create the business. This is the default applied anytime two or more people choose not to file a limited liability business entity before they operate together. Liability during this pre-incorporation stage is referred to as “promoter liability”.

A general partnership is a bottomless pit of liability. Partners are married at the hip in every action. Partners are liable for their own actions plus their partners’ actions. This is true even if every partner did not approve or was not aware. Each partner has the authority to make legally binding decisions on behalf of the general partnership. Partners share all profits and losses equally by default unless otherwise agreed upon.

Liabilities against partners in a general partnership remain “joint and several”, regardless of agreement. This means a 1% partner can be personally subject to liens and asset attachments for 100% of the general partnership liability. Only after the creditor is paid, would it be up to that 1% partner to collect proportionate shares of liability from his or her other partners to recoup his losses of 99%.

What Is a Limited Partnership?

A limited partnership does what its name suggests. It limits the responsibilities of one or more of the silent investment partners, called limited partners. A limited partner is not involved in the day-to-day activities. Their liability is also limited to their investment in the company. This differs from the rule of the general partner in the limited partnership, who is the manager and retains unlimited personal liability beyond their own investments within the company.

Many of today’s limited partnerships use a separate corporation or LLC as the general partner to address a general partner’s unlimited liability. This two-layer entity structure limits the liability for the general partner. Limited partnerships are often used in real estate investments and private equity. The term “master limited partnership” is used when the limited partnership is sufficiently large in size and solicits institutional investors.

Why Form a Limited Partnership?

Entrepreneurs should never use a general partnership. Even for “small investment” businesses where risks are remote or investments are small, the potential downside of unlimited personal liability may result in personal bankruptcy. Therefore, a better structure would be to form a limited partnership with an LLC setup to serve as its general partner, simply by forming a Delaware LLC instead. An LLC affords liability protection for everyone included by default, including a natural person as manager, without having to form a separate entity for the manager as would be needed in a limited partnership.

General Partnership vs. Limited Partnership

The biggest difference between a general partnership and a limited partnership is liability. Here are the pros and cons of both types of partnerships:

General Partnership Pros and Cons

Pros of a General Partnership:

• The general partnership is easy to start because no filing is needed. It can be started with a partnership agreement oral, written, or implied.

Cons of a General Partnership:

• Unlimited personal  liability: Each partner is jointly and severally liable for the business’s debts and obligations. This means that business creditors can come after each partners’ personal assets, such as house, car, and savings, even for the other partner’s actions whether known or unknown to the partner.
• Potential for disputes: Conflicts between partners regarding business decisions, profit sharing, or responsibilities can arise. Partners may sue each other for their bad business judgment and poor decisions.
• Shared profits: Profits by default are shared equally even if one partner contributes more effort or capital.

Limited Partnership Pros and Cons

Pros of a Limited Partnership:

• Limited liability: Limited partners’ liability is limited to the amount of their investment in the business.
• Popular form of business for private equity investors. These investment ready structures are often referred to as Master limited partnerships.

Cons of a Limited Partnership:

• Limited control: Limited partners are passive investors not involved in the day to day operations. 
• Control vested In General Partner: Aside from the Limited Partner investors, a Limited Partnership must name one or more General Partners. The General Partner has control over the day-to-day operations of the business of the Limited Partnership. However, the General Partner also has unlimited personal liability for all debts of the Limited Partnership. For that reason it is advisable for a corporation or LLC to be the General Partner, to limit the liability of the General Partner. A second alternative is to have the General Partner make an election to have limited liability, which turns the Limited Partnership into a Limited Liability Limited Partnership (LLLP) also known as “Triple – L P”.

How to Form a Limited Partnership

IncNow has a package to file a limited partnership. This package is designed for lawyers and sophisticated business owners who already have their own form of Limited Partnership Agreement.

The limited partnership is not recommended for new entrepreneurs who are better served starting an LLC.

Start your Limited Partnership today!

The post General Partnership vs. Limited Partnership: What’s the Difference? appeared first on IncNow.

What Is A Tax ID?

A tax identification number (tax ID) is a nine-digit number issued for your business by the IRS. Think of a tax ID as a social security number for your business. Your tax ID number is often used for identification, and the IRS uses this number to administer tax laws.

What Is An EIN?

EIN stands for Employer Identification Number. While there can be some confusion about the difference between a tax ID number and an EIN, they’re actually different names used to describe the same thing.

What Is A TIN?

TIN stands for Taxpayer Identification Number, issued by the Internal Revenue Service (IRS). For noncitizens and non-permanent residents of the U.S. who are often overseas, there may arise a need for the equivalent of a SSN without the associated federal benefits. For example, those people living overseas may need to file certain documents with the U.S. Government. While many of them may do so by obtaining an Employer Identification Number “EIN” for their business, others who do not require an EIN can simply obtain an Individual Taxpayer Identification Number “ITIN”.

Taxpayer ID vs. EIN

Again, a tax ID is an EIN. The terms are often used interchangeably, although the different terms can cause confusion.

Is A Taxpayer ID The Same As An EIN?

Yes, a taxpayer ID is the same as an EIN. However, the EIN is a taxpayer ID for a company and will often be found on business forms.

What Is A Tax ID or EIN Used For?

An EIN is required to withhold taxes from your employees and to open a business bank account. You will also be asked to supply your tax ID number when you fill out any application that requires your business to validate its authenticity.

How Do I Apply For An EIN?

When you incorporate your business, a registered agent like IncNow can often secure an EIN for your Delaware LLC after the Certificate of Formation is approved by the Secretary of State.

To obtain the number, you can fill out a simple online form at IRS.gov/EIN or ask an incorporation service to assist you. You will need to have a signed and completed IRS Form SS4. Should you want help getting the EIN, you can name a third party designee on the IRS Form SS4.

Should you have a social security number, the IRS will often provide the EIN right away online to you or the third party designee. Without a SSN, the IRS will ask that a Form SS4 be faxed in to their office. Faxing in the information is a slower process. When faxed in, the EIN usually takes 3-5 weeks for the IRS to assign. In around that same amount of time, two to five weeks, you will also receive a hard copy of your tax ID from the IRS in the mail.

How Long Does It Take To Get A Taxpayer ID?

The Taxpayer ID is also known as an Employer Identification Number (EIN). IncNow’s EIN service typically takes one business day.

It is a longer process for non-U.S. citizens. For non-U.S.-citizens applying for an EIN for their new business, the IRS requires the SS4 to be faxed in and the IRS assigns with the Taxpayer ID in 4 to 6 weeks.

Most U.S. citizens can obtain up to one Taxpayer ID per day using the IRS online EIN wizard. IncNow offers a service to assist new business owners with the IRS Form SS4 to obtain a Taxpayer ID whether or not they are a U.S. citizen.

How Is A Tax ID Number and EIN Different From An ITIN?

An individual taxpayer identification number (ITIN) is a tax number given to some non-U.S. residents and resident aliens, as well as their spouses and dependents, who are not able to obtain a social security number. If you plan to incorporate in Delaware and you do not have a social security number, you should not need to obtain an ITIN. The Form SS4 does not require an ITIN to obtain an EIN.

Can You Use Your EIN For Multiple Companies?

No, you cannot. Since an EIN is a tax ID number that the IRS assigns to a company, each company must apply for its own unique EIN. Regardless if the company has the same owner, different types of entities are going to be taxed differently and require separate EINs.

One exception to the rule is a Series LLC. Technically, a Series LLC only requires a single EIN regardless of the number of protected series it has. Additionally, when a corporation or LLC has fully owned subsidiaries that single member LLCs, the “children” are known as disregarded entities for tax purposes and have the option to either obtain separate EIN numbers or use their parent entity’s EIN.

The post Tax ID vs. EIN: What’s the Difference? appeared first on IncNow.

Are there shareholders in an LLC?

Limited Liability Companies do not have stock or bylaws. In fact, LLCs have almost no features of corporations. LLCs are known in legal circles as “unincorporated entities” because they are creatures of contract, rather than corporations which are creatures of statute.

But what does it mean to be a “creature of contract”? Are not LLCs authorized by the Delaware LLC Act? Does that not make them statutory?

The general answer is that corporations have statutory formalities and hierarchies they must follow and cannot waive. Corporations have “default rules”, many of which cannot be changed.

How is an LLC structured?

In the Delaware LLC there is not a default rule to establish the LLC framework. Instead, the entire framework for an LLC can be established by its Operating Agreement. After a general notice filing with the formation jurisdiction, called a Certificate of Formation in Delaware, the LLC private Operating Agreement takes over to set forth the ownership structure and management structure. It may provide for a broad purpose or a single purpose. It can give managers broad powers or narrow powers. It can provide for member liability or limit member liability for capital calls and other obligations.

Who Owns the LLC?

The LLC does not have stock or stockholders. Instead, the Operating Agreement has membership interests, which are not usually certificated. It’s all about the rights set forth in the Operating Agreement.

Delaware allows for maximum flexibility of contract when entering into an Operating Agreement. In exceedingly rare situations, LLC members use this freedom to “opt into” the Delaware General Corporation Law and establish members to establish rights of corporate stockholders who vote for directors who appoint officers. That anomalous situation is far from the norm. Most Delaware LLCs have owners called members and operators called managers whose power and duties are set forth in the Operating Agreement. This structure is much less bureaucratic than the corporate formalities which makes LLCs more popular.

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You may have seen the “Circle B” logo, but what does it mean? The logo can only be displayed by a Certified B Corporation. These are companies that have achieved a minimum score on an evaluation of their corporate governance, community, employee, and environmental benefits. Here’s what you need to know about this entity.

What Is a Certified B Corporation?

Certified B Corporations are for-profit entities that exhibit world-class standards for sustainability, transparency and accountability. These standards are audited periodically by the independent industry standard organization, B Lab. 

B Corp Certification can be likened to Fairtrade or USDA organic certification for products such as bananas or milk. The difference is that the certification looks at a company as a whole rather than just a single product. According to Juan Pablo Larenas, Executive Director of B Lab Global, “The B Corp Certification does not just evaluate a product or service; it assesses the overall positive impact of the company that stands behind it”. 

B Lab issues the B Impact Assessment, a free online tool that any company can use to assess its social and environmental performance. The assessment is scored out of 200 points. The average score for companies who complete the assessment is between 40 and 60 points. Certified B Corporations however are required to maintain a minimum verified score of 80 or above. Companies are able to compare their scores and share resources to help improve their score over time. 

The B Impact Assessment is a strict evaluation assessing a company’s overall impact on their workers, community, customers and environment. This holistic look at a company certifies a certain level of compassionate capitalism. Certified B Corps signal to potential customers and partners that they value stakeholder primacy over profit maximization. Increasing numbers of investors and customers now seek out companies that demonstrate sustainable business practices. 

B Corporation Requirements

1. Verified social and environmental performance. By maintaining their minimum B Impact score of 80 and submitting triennial assessments, Certified B Corps undergo a rigorous process to have their standards independently verified. 
2. Transparency. Certified B Corporations are required to share their B Impact Score publicly on bcorporation.net. 
3. Accountability. Many Certified B Corporations have adopted various legal structures which require them to consider their impact on all stakeholders of the company. These structures include traditional LLCs and corporations, as well as public benefit corporations and public benefit LLCs. 

How to Form a B Corporation

The first step of the B Corp application is to complete the B Impact assessment. Companies are required to have a minimum score of 80 in order to achieve certification. Companies must then maintain their passing B Impact score and recertify every three years. 

Becoming a B Corp is not simply a “participation trophy”. B Lab audits an applicant’s business practices, which is often a seven month process. It entails the initial 216 question application, the production of corporate documents and a series of interviews. Certification requires a company to open its books, goals and overall purpose for complete assessment based on standards set by the trained professionals at B Lab. Certified B Corps need to prioritize and disclose their impact to ensure continued progress toward their social, environmental and governance goals.

The rigor associated with B Corp certification distinguishes companies that make a real impact from those just with good marketing. Applying for B Corp status may not result in more business initially. Companies pursuing this certification look to legitimize their commitments to sustainability. 

The New “B Economy”

As the number and popularity of Certified B Corps has grown, so has their influence over other companies. The “B Economy” represents the greater community surrounding B Corps. This includes the more than 40,000 companies that have used the B Impact Assessment to improve their social and environmental performance, the millions of customers who buy from and support sustainable businesses, and the increasing number of investors seeking to invest in Certified B Corps. 

According to B Lab, over 120 venture capital firms have invested more than $2 billion in Certified B Corporations. The prevailing theory amongst these firms is that producing stakeholder value will produce the best financial returns. 

Although the B Corp movement started in the United States, it has spread all over the globe. There are now more Certified B Corps based outside of the United States than inside. Large multinational companies are beginning to adopt and promote B Lab standards throughout their global operations. In 2017, the French multinational Danone announced its intention to become the first Fortune 500 company to achieve B Corp certification. The company has already helped several of its subsidiaries achieve B Corp status. As of 2018, Danone has nine subsidiaries that are now Certified B Corps. 

The emergence of the B Economy is an exciting development. It means that anyone can participate in the broader movement to conduct business in a way that is best for profits and for the world. Certified B Corps represent a global community of leaders that benefit from increased credibility and trust. This enables them to attract more talent and promote better employee engagement.

IncNow: Delaware’s First B Corp

In May 2019, IncNow became the first incorporation service worldwide to be a Certified B Corp, and the first Certified B Corp in the State of Delaware. IncNow’s shareholders and directors approved an amendment to its corporate charter to declare its public benefit purposes, making them part of its governance structure. The company dedicates five percent (5%) of annual gross profits to support the environment, education, entrepreneurship and the arts in the greater Delaware Valley.

Examples of IncNow’s involvement in preserving and remediating the environment include its commitment pro bono clean water advocacy. The company is also involved in the leadership structures of the Delaware Natural Areas Advisory Council and the Christina Conservancy. It has also sponsored watershed cleanup initiatives and conservation in Delaware’s nature preserves. 

IncNow stands out even amongst Certified B Corps, earning the Best for the World award in corporate governance. Companies receiving the Best for the World honor rank in the top 5% of all B Corps worldwide for their impact in specific areas included in the B Impact assessment. Examples of IncNow’s award-winning governance include sponsoring athletic competitions for employees and company sponsored trips to destinations such as Portugal, Hawaii, Iceland, and Netherlands.

Pros and Cons of Forming a B Corporation

Forming a B Corporation also known as a Public Benefit Corporation (PBC) offers a unique business structure that allows the management to take into consideration stakeholder interests in the mission locked public benefit purpose that may not maximize the value to stockholders. To customers, employees, community and investors, it shows a commitment to certain social and environmental objectives. However, like any business decision, there are both pros and cons to consider. Here’s a breakdown:

Pros of Forming a B Corporation

1. Credibility and Trust:

Beyond simply incorporating as a PBC (or public benefit LLC), often these businesses seek out third party validation that they really are doing good. For example the gold-standard of this certification process is by a third party service, known as B-Lab at BCorporation.Net. B Corp certification is widely recognized as a symbol of commitment to social and environmental performance, making it easier for customers and investors to trust your business.

2. Attracting Purpose-Driven Customers:

Many consumers prefer to support businesses that are socially and environmentally responsible. Being a B Corp helps your company appeal to this growing market of conscious consumers.

3. Access to a Like-minded Network:

As a certified B Corp, your business joins a global community of purpose-driven companies, providing opportunities for collaboration, partnerships, and sharing best practices.

4. Employee Satisfaction and Retention:

Companies that focus on a broader mission than profit often attract employees who are passionate about making a positive impact. This can lead to higher employee engagement, satisfaction, and retention.

5. Legal Protection for Mission:

B Corps are legally able to consider the impact of decisions on stakeholders (not just shareholders), which helps protect the company’s social mission, even if owners think that decision is wasting potential corporate profits.

6. Attracting Impact Investors:

B Corps often have access to a broader pool of investors who are looking to make a positive impact, in addition to earning a financial return.

7. Marketing and Brand Differentiation:

B Corp certification can serve as a unique selling point, helping to differentiate your company in a competitive market and appeal to consumers who prioritize social and environmental responsibility.

Cons of Forming a B Corporation:

1. Costs and Time Commitment:

Certification involves application fees and costs for the required assessments. It can also be time-consuming to gather the necessary documentation, which may involve dedicating significant internal resources.

2. Rigorous Standards:

B Corps must meet high standards across various aspects of the business, including governance, workers’ rights, environmental impact, and community engagement. Maintaining compliance with these standards requires continuous effort.

3. Ongoing Reporting and Recertification:

B Corps must complete recertification every three years, which requires ongoing transparency and updating of practices. This can be a significant administrative burden. Additionally a Delaware PBC must report to its shareholders every other year on how it is advancing the public benefit mission.

4. Potential for Public Scrutiny:

Because B Corps are committed to transparency, they can face public scrutiny if they fail to live up to their standards, which can damage the company’s reputation.

5. Limited Focus on Financial Performance:

While B Corps balance social impact and financial performance, some investors may prefer a stricter focus on profitability, potentially making it harder to attract traditional venture capital or certain financial backing.

6. Complex Governance Structure:

Companies must integrate social and environmental goals into their legal structure. This may require changes to the company’s bylaws, governance documents, or operating procedures, which can be complex and challenging to implement. For example the B Corp must consider their Greenhouse Gas emissions through direct and indirect activities. This is not just a smokestack that emits carbon dioxide, but also considers the commute of employees to an office.

7. Limited Global Recognition:

While B Corp certification is growing, it is not universally recognized across all regions or industries. In some markets, it may not carry as much weight or may be less relevant to customers who just want to get the lowest price without concern about negative externalities, built into the products and services being consumed.

The post What Is a Certified B Corporation? appeared first on IncNow.

If you have ever tried to rent an apartment or lease a vehicle, you are probably familiar with the personal credit system. Your Social Security Number is attached to credit reports generated by major credit bureaus. Potential lenders then use your credit score to assess your ability to borrow money. Much like how a Social Security Number is connected to your personal credit profile, a DUNS Number provides a credit profile for your business.

But what exactly is a DUNS number, and how does it work? We cover the ins-and-outs of the DUNS system and how establishing a credit profile can help your business. We also address how the federal government has moved away from the DUNS system for the purpose of awarding government contracts.

What is A DUNS Number?

DUNS stands for the “Data Universal Numbering System”. The DUNS Number was created by data services company Dun & Bradstreet (D&B), and is designed to mimic the personal credit reporting system but for commercial businesses. Lenders widely recognize the system as the universal standard for establishing the creditworthiness of companies.

Much like credit scores in the personal credit system, the DUNS generates a “Paydex score” for each company. D&B evaluates the borrowing behavior of a company and assigns a Paydex score running from 0-100. A score of 75 or greater is considered to be good credit. This is similar to a credit score above 730 in the personal credit system.

 Do I Need A DUNS Number?

Using a DUNS number to build a credit profile for your business can be beneficial whether you are a large multinational corporation or a small mom and pop shop. A high Paydex score can help you secure larger loans. This is ideal if your company requires substantial amounts of operating capital to either support its business or to expand.

Commercial credit can also be useful for small businesses and sole proprietors. A company with a solid Paydex score may be able to assume assets under the name of the business without requiring personal guarantees from its owners. In a way, this allows owners and managers to maintain separation between their personal assets and the creditor liabilities of these businesses.

How Do I Get a DUNS Number?

To get a DUNS number, you first must form your company as a legal entity in a US state of your choice. Entity options include LLCs, corporations, limited partnerships, and others. After establishing your business entity, you can contact Dun & Bradstreet to request your number for free.

To obtain your DUNS number, D&B will require specific information regarding your business entity. This includes the following:

• The entity name;
• Formation date;
• State identification number or filing number;
• Nature of the business;
• Number of employees;
• And the Employer Identification Number (EIN).

To obtain a DUNs number, a company must disclose specific information about its beneficial owners. Some states, like Delaware, do not require this information on any of the incorporation documents that are filed with the state. The DUNS Number application requires the names, phone numbers and addresses of all beneficial owners. D&B will independently verify the information by contacting whomever is listed as the ultimate beneficial owner. After verifying that all necessary information is correct, they will issue the DUNS number for the entity.

Changes to the DUNS System

In the past, the federal government required all public and private entities to have a DUNS number in order to bid on government contracts or apply for grants. As of April 4, 2022, the government will move away from the DUNS system. The Unique Entity Identifier Number (UEI) will take its place.

The UEI system is more centralized and avoids making companies go through a non-governmental organization to acquire a credit identifier. The federal government has tasked the General Services Administration (“GSA”) with managing the new UEI system. The GSA claims to have generated cost savings through competition by having Ernst & Young (EY) and D&B bid against one another for providing credit reporting services. The agency ultimately assigned the contract to EY. The goal is to create a more sustainable process without the need to transition again in the future.

How Do I Get A UEI Number?

The government administers Unique Entity Identifier Numbers through the System for Award Management website. You can visit SAM.gov to obtain a UEI for your business. Note that if you have already registered your company in SAM.gov, it will already have an existing UEI number.

The existence of the UEI does not completely remove the need for a DUNS number. Commercial lenders and vendors still use the DUNS system and Paydex score  to assess the creditworthiness of commercial entities and enable them with better access to credit.

UEI vs. DUNS Number

A Unique Entity Identifier (UEI) is the business ID number used in the SAM.gov portal for US federal government grants and contracts. If your business is seeking a grant from the federal government, it will first need to register with the System for Award Management (SAM). UEI replaced the Data Universal Numbering System (DUNS) as the primary ID under the US federal government. What people call a “DUNS number” refers to a nine-digit unique number created by a private company known as Dun & Bradstreet, which is similar to a credit rating agency for business entities. Unlike the DUNS number, the UEI is not owned by a third-party private party. The UEI was designed to simplify the process of conducting business with the US federal government.

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