So you have this great idea for a business and you’re ready take it to the next level. Just a few formalities and you’ll be well on the way to success. Don’t let the legal side of starting and owning a business tie down your entrepreneurial spirit and drive. Here are the basics to get you legally up and running in North Carolina.
Step 1: Choose an Entity Type
A sole proprietorship isn’t really an entity type, but it certainly is one way to own a company. There are no formalities for owning a sole proprietorship. The owner literally reports the company’s income as their own income on their tax return. While the cost of owning and maintaining a sole proprietorship is almost nonexistent, the potential for liability is huge. If the owner of a sole proprietorship defaults on a loan or damages a customer’s property, they are personally liable for that debt or damage. There is literally no shield from liability with a sole proprietorship, and we absolutely never recommend running a company like this.
A partnership is simply an agreement, express or implied, between two or more persons who join together to carry on a business for profit. Each partner contributes money, property or labor and they each share proportionately in the profits and losses of the business. Under a general partnership, each partner has unlimited liability for the debts of the business. This is almost as bad as a sole proprietorship, and we never recommend that our clients form a partnership. Limited partnerships somewhat limit liability for some or all members, but they are still archaic, inefficient, and less safe than an LLC or a corporation.
Mostly everyone thinks of an “LLC” when they imagine a small business. LLCs or “limited liability companies” are actually great for small businesses. They protect the business owner by offering “limited liability.” That basically means that if someone sues the LLC, they can generally only get to the LLC’s assets and not the owner’s assets. However, if the owner of the LLC intentionally harms someone or guarantees a loan, they will still be liable. LLCs also offer significant tax flexibility because they can be taxed as a partnership or as an “S Corp.” under Subchapter S of the Internal Revenue Code. Choosing the LLC’s tax status can be a powerful strategy in retaining as much income as possible.
On the other hand, some people choose to incorporate, and they form a corporation. Corporation’s usually contain “co.,” “corp.,” “inc.,” or “incorporated” in their name, which indicates that they are a corporation. A corporation is a separate entity for tax purposes. In other words, the corporation is generally taxed, and then the owner is taxed on income received from the company as well. This is referred to as “double taxation” and it’s really a cash flow killer. However, corporations are generally a better option if the owners want to raise money from investors or eventually allow the company to become publicly traded. Corporations still have the limited liability that LLCs offer, but they are taxed separately, which usually makes them more expensive to maintain.
Step 2: Form the Company
In North Carolina, the Secretary of State’s office handles registration and ongoing regulation of limited liability companies and corporations. For LLCs, the owner or “organizer” simply files Articles of Organization with the Secretary of State. As of 2017, the filing fee is $125. For corporations, the owner is called the “incorporator,” and they must file Articles of Incorporation with the Secretary of State. The filing fee for corporations is also $125 as of 2017.
On either form, the company must list a principal office and a registered agent. The registered agent is the person who will receive official mail from the State on behalf of the company. The agent will also receive any lawsuits or legal mail for the company. Many people list themselves as registered agent, but it can be helpful to have an attorney as your agent. Having an attorney as your registered agent isn’t expensive, and they will let you know immediately if you receive anything that actually requires your attention.
There are more options and details that can be worked out in the Articles, but these are just the essentials. There you have it – with those documents filed, you’ve got a legal entity! Now you just have to maintain it.
Step 3: Maintain the Company
North Carolina limited liability companies must file an annual report with the Secretary of State once every year by April 15th. There is a $200 filing fee, and this is a simple document that basically states that your company is still in business. However, if you fail to file this, the Secretary of State will administratively dissolve your LLC, and you will be in big trouble – both in liability and with taxes! Hiring an attorney to be your registered agent avoids this mess ahead of time because your attorney will give you a call when it’s time to file your annual report.
Corporations in North Carolina must file their annual report by the due date for filing their income and franchise tax returns. The corporation may file its annual report with the Secretary of State or with the North Carolina Department of Revenue when the corporation files its taxes. Remember that corporations are taxed as entities themselves. LLCs aren’t taxed as entities – their income and losses flow through to their owners who are taxed as individuals. Corporations face this “double taxation.” The filing fee is $200 plus either a $20 or $25 fee based on whether you file electronically or via mail. The same rules apply - if you don't file your annual report, you will be in HUGE trouble!
Step 4: Run Your Business!
Steps 1 through 3 are the legal essentials. Additionally, you should meet with an accountant to set up an accounting system, obtain any required business licenses, get trademarks for your logos, create an exciting website, run some marketing campaigns, make money, and pay taxes on that money! Once you’ve completed these basic legal steps, you’re free to pursue your dream of taking your business to the next level.
At Barber Power Law Group, our experienced corporate attorneys have set up many LLCs and corporations. We put extra time and effort into understanding our clients' needs and helping them craft a company that's perfect for them. With every company we form, we deliver unique, detailed legal documents that go far beyond the sample forms the State and LegalZoom provide. Call us today at (980) 202-5679 for a free consultation!