Although often called “incorporation”, formation is the proper term for setting up a business as its own legal entity by registering it with a state. Formation could mean you’re setting up one of several legal structures, like a limited liability company (LLC) or a corporation. When you form an entity, you’ll have to pay fees to set it up, comply with all regulatory and tax requirements, and file reports.
The individual current equity value for an entity’s stock (equity) is the present value of that individual’s or entity’s ownership. This is calculated by dividing the entity’s current equity value by the total number of available shares, and then multiplying that by the total number of shares owned by the individual or entity. For example, if the total current equity value is $1,000 with 100 shares in total and an individual or entity owns 25 shares, the individual current equity value is $250 (($1,000/100)*25).
The individual equity cost basis for an entity’s stock (equity) is the original price that was paid by an individual or entity to realize ownership. This is calculated by multiplying the total number of shares (purchased by the individual or entity) by the price per share. For example, if an individual or entity purchased 25 shares at a price per share of $5, the individual equity cost basis would equal $125.
Jurisdiction refers to the part or level of the government which has authority over a business entity. The federal government has jurisdiction over federal taxes, but the state where the entity is incorporated has jurisdiction over the corporate law of the business. The most important jurisdiction concepts for entities are the place of incorporation and the principal place of business.
A limited liability company (LLC) is a business structure that combines elements of a corporation and a partnership. An LLC allows business owners to take advantage of the taxation of a sole proprietorship and the liability of a corporation. Essentially, you won’t be held individually liable for company debts or other responsibilities but can still enjoy the ease of merging your business profits with your personal income for tax purposes.
A limited liability limited partnership (LLLP) is a sophisticated business entity designed primarily for investment purposes. It shares many of the characteristics of limited partnerships, except that the general partner gets additional limited liability protections. Any lawsuits brought against the company or misconduct by the other general partners are not brought against the general partner, as they are shielded from personal liability. This limited liability protection also extends to the general partner’s protection against the negligence or misconduct of other general partners.
A Limited Liability Partnership (LLP) is a business relationship in which one partner is not responsible for the negligent acts committed by another partner or by the employees not under that partner’s supervision. A Limited Liability Partnership is essentially a General Partnership, but each partner is not liable for certain acts of other partners. An LLP also limits the personal liability of a partner for the errors, omissions, incompetence, or negligence of the partnership’s employees or other agents. State laws vary regarding LLPs and only about half of the states recognize them. Each of the partners (there can be more than two) shares in the profits and shares in the debts of the LLP, including losses, unless the partner is a limited partner. An LLP is considered an association of co-owners for tax purposes, and each co-owner is taxed on his or her proportional share of the LLP profits.
Limited partnerships have a general partner (GP) and at least one limited partner (LP). A limited partner has no management authority and cannot generally bind the partnership. The GP retains all the management authority. Limited partners are usually financial backers who participate in the proceeds. The general partner has liability for conduct of the partnership, whereas each limited partner’s liability is capped at the investment in the partnership. Limited partnerships are popular for project-based businesses such as real estate development and investing. The GP is typically a corporation that seeks out LPs to raise financing for a project.
An organizational chart, commonly referred to as an org chart, is a visual representation of a firm’s organizational structure. An organizational chart is a diagram that visually conveys a company’s internal structure by detailing the roles, responsibilities, and relationships between individuals within an entity. The individuals and positions are often represented by boxes or other shapes, sometimes including photos, contact information, email and page links, icons and illustrations. Corporate org charts present simple and complex entities in a single view. For legal entity management, org charts make planning and defining complex structures easier.
Ownership structure concerns the internal organization of a business entity and the rights and duties of the individuals holding a legal or equitable interest in that business. As owner of the business entity, it is important to understand how the ownership structure of a particular business entity is organized and what that means for the owner’s rights. Companies with private structures can control who buys and sells shares. Companies with public ownership can have public investors buy and sell shares on the open market.
A parent company is a single company that has a controlling interest in another company or companies. Parent companies are formed when they spin off or carve out subsidiaries, or through an acquisition or merger. Parent companies often have controlling stakes in their subsidiaries, which gives them the power to make decisions about the subsidiary’s operations. Parent companies may also provide financial support to their subsidiaries. Parent companies usually have greater resources than their subsidiaries, which allows them to take on more risk. Subsidiaries are often less risky investments because the parent company backs them.
Child entities, then, are a type of entity defined with another specific entity called the parent. Child entities can have their independent existence, but they cannot exist without their parents. That’s because they inherit the attributes of their parent entities. For example, if ‘Vehicle’ is a parent entity and ‘Car’ and ‘Bike’ are child entities, the hierarchy would have ‘Vehicle’ at the top, with lines connecting it to ‘Car’ and ‘Bike’. The lines would converge in a circle or an ellipse, indicating that ‘Car’ and ‘Bike’ are specializations of ‘Vehicle’. In some cases, the child entities may also have their own child entities, creating a multi-level hierarchy. For instance, ‘Sports Car’ and ‘SUV’ could be child entities of ‘Car’, inheriting its attributes and further specializing them.
A partnership is a formal arrangement by two or more parties to manage and operate a business and share its profits.
A Professional Limited Liability Company, or PLLC, is a special type of LLC that’s designed for licensed professionals, such as accountants, lawyers, and doctors. Licensed professionals can set up a professional LLC to protect their personal assets. This means that if someone sues the business, only business assets would be at risk rather than the individual assets of the professional. The same goes for the business’s other creditors. If the professional LLC owes a creditor, the creditor can only go after the business’s assets and not the individual assets of any member of the company.
A registered agent serves as a legal point of contact, ensuring that a firm receives important legal documents and notifications from government agencies and courts in a timely manner. A registered agent can help firms establish credibility and improve how they organize and structure their legal documents and data. Additionally, a registered agent offers privacy by shielding owners’ and executives’ personal addresses from being exposed in public records, enhancing security and minimizing unwanted solicitations. Lastly, a registered agent can aid firms in ensuring compliance with state regulations, staying up-to-date with filing requirements, and avoiding potential penalties or legal complications.
In an S corporation, shareholders elect to be treated as a partnership from a tax standpoint, which means they are only taxed once, and the business becomes a pass-through entity. Shareholders in an S corporation must be U.S. individual investors; certain estates and trusts are also permitted to be shareholders. They cannot be foreign persons or corporations. Shares in an S corporation are simpler to transfer than membership in an LLC. That means that if you are trying to attract outside investors, an S corporation may make it easier to accomplish that goal.
When you form a business, whether a sole proprietorship, partnership, LLC, or corporation, the Secretary of State’s office registers and authenticates business entities and trademarks. The Secretary of State’s office processes, files, and maintains records related to business entities.
The total current equity value for an entity’s stock (equity) is the present value of a specific stock class or all stock classes combined. There are numerous factors that can contribute to the increase or decrease in total current equity value. Note that the total current equity value is not dependent on the total quantity of shares held by individuals or entities.
Cost basis is the original value or purchase price of an asset or investment for tax purposes. It is used to calculate capital gains or losses, which is the difference between the selling and purchase prices. Calculating the total cost basis is critical to understanding whether an investment is profitable and if it has any possible tax consequences. Cost basis for an asset can change over time for many reasons. Consider an office building: Taking depreciation lowers the building’s cost basis, but the cost of a new roof is a capital improvement that adds to the cost basis.
The trustee is a person or entity (like a bank or a company) who manages property or assets that have been placed in a trust. The trustee’s role is to handle both the daily and long-term management of the assets and distribute them according to the terms of the trust. No matter the type of trust, a trustee has what is called a fiduciary responsibility. This means that the trustee must use the utmost care and loyalty when managing the trust and cannot use it for their own personal gain. The trustee is legally required to work in the best interests of the trust and its beneficiaries.
When purchasing commercial real estate across the United States, the laws, guidelines and ethics are generally all the same thanks to the Uniform Commercial Code (UCC). The Uniform Commercial Code (UCC) is a comprehensive set of laws governing all commercial transactions in the United States. It is not a federal law but rather a uniformly adopted state law. Because the UCC is universal across the country, businesses can enter into contracts knowing that the terms will be enforced in every jurisdiction. For investors and companies who do business in multiple states, the Uniform Commercial Code is extremely important, as it ensures some standardization for their business.
