Business Entity Formation, Reorganization, Sales and Acquisitions and Buy-Sell Agreements

Legal Forms of Business:

Another important factor to deliberate is the legal form your business organization will take. Your business may be in the form of a sole proprietorship, a partnership, a corporation or a limited liability company. There are advantages and disadvantages to each form of business organization, and you should ask your attorney and accountant which form would best suit you and your proposed business venture.

A sole proprietorship is the simplest form of business organization and has the lowest startup costs. The owner makes all of the decisions, retains all of the profits and is personally liable for all of the business debt. This form of business may limit growth if the owner is the only source of capital and know-how.

A partnership is two or more persons who carry on as co-owners of a business for profit. A partnership agreement may be verbal, but it should be in writing and prepared in final form by an attorney. Partners must be chosen carefully, because each partner can bind the others and make them each personally responsible for actions taken by the other partners in conducting business. Conflicts between partners may become so serious they could threaten the existence of the business and incur additional legal issues and expenses in the future.

A corporation is a more complex form of business organization, and it exists totally under the provisions of state law, both as to its formation and as to its scope of operation. It is an entity separate and apart from the shareholders but it has the same rights and obligations as an individual. For instance, a corporation can own property, can conduct business, can incur liability and can sue or be sued. A corporation is formed by filing articles of incorporation with the Oregon secretary of state. There are two primary distinguishing features of a corporation. The first is limited liability of the shareholders for corporate debt. That means shareholders are generally not individually liable for company debts unless they sign a personal guaranty. The second distinct characteristic is that a corporation provides continuity of the business and the entity continues in existence even after the death of a shareholder or the transfer of shares.

These two factors can be very important in some types of business. Your attorney should be consulted for more information about incorporation of the business, its costs and its possible tax consequences.

A limited liability company or “LLC” is also a statutory entity. It is similar to a corporation in that it provides limited liability protection for its owners, but it is taxed either as a partnership, sole proprietorship or as an entity, like a corporation, depending upon how it is organized. An LLC is formed by filing articles of organization with the Oregon secretary of state.

No matter which form of business entity you choose, if you intend to use a business name other than your own name or the name of your corporation or LLC, you must register an assumed business name with the corporation division in the secretary of state’s office.

The state of Oregon does not impose a sales tax, but it does impose an income tax on every person and an excise tax on all corporations doing business within the state. Also, most businesses are required to make contributions to the state’s unemployment compensation trust fund in addition to providing workers’ compensation insurance for their employees. Likewise, the federal government will impose a tax on all income from the business. Social Security taxes also will be payable on every employee. For tax purposes, you must understand the differences among, and keep careful records of the following: ordinary and necessary business expenses; travel and entertainment expenses; capital expenditures; depreciation; investment tax credit; and other matters relating to your assets and your income. Generally, your attorney or accountant will be available to assist you in complying with government regulations and minimizing the tax burden at all levels.

You will find that the city or county in which you are located may assess an annual business license tax. You should check the requirements of each city or county in which you will do business. You must also conform to local zoning laws relating to the location of your business. It is important to check with the town or county planning department before selecting a business location.

Your business also may be subject to other state and federal laws and regulations. For instance, the regulation and control of air, noise, water and solid and hazardous waste is governed by the Oregon Department of Environmental Quality. Oregon also has laws dealing with minimum wages, length of hours of work and working conditions. Your employees will be subject to federal and state labor laws.

These are a few of the things that must be considered by anyone thinking of going into business. Talk to your accountant and your attorney regarding some of the decisions that need to be made prior to starting your business.