Opening a New Business in Arkansas Part 2
Before forming a new entity, it is important that you understand the different types of entities that exist under Arkansas laws. Companies are unique and a different entity may make sense for some that would not for others.
Sole Proprietorship and General Partnership
A sole proprietorship is a company with one owner with no formal separation of business structure. The owner essentially is one with the company, which means the owner is responsible for all debts and obligations of the company. There are obvious risks to this approach, but it does allow more flexibility for the owner in decision making and operations.
A general partnership is very similar to a sole proprietorship, with the primary exception being that it has multiple owners. Many partnerships have written or oral agreements known as partnership agreements that establish the ownership and profit-sharing arrangement. As with a sole proprietorship, though, the owners are not distinguished from the company and will be personally liable for the debts and obligations of the company.
Limited Liability Company (LLC)
Unlike sole proprietorships and general partnerships, an LLC does establish a separate business entity that distinguishes the owner from the company. In Arkansas, an LLC can be formed by filing an Articles of Organization form with the Secretary of State. Typically, the LLC should also have an Operating Agreement. This agreement binds the owners (also known as Members) by contract to operate the business in a certain manner. An Operating Agreement also typically sets out the ownership interests of each owner and the manner in which ownership can be transferred. For most, if not all LLCs, even those with only a single owner, it is advised that an Operating Agreement be executed as part of the formation process. Since LLCs are separate entities, each is required to have a registered agent appointed. The registered agent is someone with the State of Arkansas that is designated to accept service on behalf of the entity.
Like an LLC, a corporation is established as a separate business entity that operates distinctly from its owners (or shareholders). The corporate structures are generally more complex than that of the other entity types. A corporation can be formed by filing the Articles of Incorporation with the Secretary of State. The Articles of Incorporation and/or the corporation's By-Laws typically regulate the manner in which the corporation must operate, appoint officers and directors, and establish initial stock issuance and ownership. Despite the additional complexity and restrictions of a corporation, this structure is still often desirable due to the liability protections it offers owners and shareholders.
An S corporation is a specific type of corporation. The S corporation structure allows the owners to report the business profits and losses on their personal tax returns while still otherwise maintaining the corporation as a distinct separate entity. This type of corporate structure is only available to corporations that meet certain requirements (e.g. limited to 100 shareholders and one class of stock).
Limited Liability Partnerships/Limited Partnerships
A partnership or general partnership can limit liability for its owners by registering with the Secretary of State. These partnerships generally register as Limited Liability Partnerships (LLPs). An LLP is still taxed like a partnership but has greater liability protection. Typically, LLPs are formed by professionals such as doctors and accountants. An LLP can provide protection from personal liability for the actions of another partner, but typically the specific actor will still be held personally liable for his/her own actions.
A limited partnership is similar in that it is treated as a partnership for tax liability purposes as well and provides limited liability protection for some partners. This type of entity distinguishes between general partners and limited partners. Limited partners typically have small roles in management and have personal liability protection; while general partners manage the business and have no liability protection.