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Business Formation

BLG can serve as your business’s legal partner and consultant whether you have a startup or a well-established business. When starting a business, the first issue you face is to select the type of business formation that will best serve your needs. Below, you will find brief descriptions of the formation and operation of the different types of businesses in Arkansas.

SOLE PROPRIETORSHIPS

A Sole Proprietorship in Arkansas is a form of business in which one person owns all the assets of the business in his or her own name. It is a person who does business for himself or herself without formally creating a separate business organization. Over 70% of all businesses are sole proprietorships. Often, these are businesses that require minimal amounts of capital.

  • Filing: If operated under an assumed name, you must file a certificate in the county clerk’s office in the counties in which the person operates or intends to operate the business, but filing with the Secretary of State is not necessary.
  • There are no requirements as to how a sole proprietorship must be capitalized. 
  • Management and Control: The owner makes all decisions in the business’s operation.  
  • Profit and Loss: The owner receives all profits and suffers all losses. 
  • Owner Liability: The sole proprietor is personally liable for all liabilities of the business. 

For a detailed discussion of the Arkansas Sole Proprietorship, click here:
http://www.lawforchange.org/NewsBot.asp?MODE=VIEW&ID=2580

PARTNERSHIPS

A General Partnership is a joint business in which responsibility for management, profits, and, most importantly, the liability for debts is shared by the general partners. Anyone entering into a general partnership must remember that each general partner is liable for all the debts of the partnership. Furthermore, any partner alone can bind the partnership on contracts. In essence, a general partnership is a collaboration between two or more sole proprietors.

  • Filing: If operated under an assumed name, you must file a certificate in the county clerk’s office in the counties in which the general partnership operates or intends to operate the business, but filing with the Secretary of State is not necessary. Nevertheless, a general partnership should have a written agreement to govern the business’s operations.
  • Capitalization:There are no requirements as to how a general partnership must be capitalized, but normally, the operating agreement specifies the amount of capital each partner is to contribute. A partner’s contribution may be money, property, or services.
  • Management and Control: Absent a management agreement, each partner has equal rights to manage the business.  
    • The ordinary course of business is decided by a majority of the partners; however, amendments to the agreement and matters outside the normal course of business require a unanimous vote.
    • In addition to the management agreement, the partnership may file with the Secretary of State a statement of partnership authority specifying certain transactions that an individual partner may undertake, especially for the acquisition and sale of real estate.
  • Profit and Loss: Each partner receives an equal share of profits and losses, unless the partnership agreement provides otherwise.
  • Owner Liability: Partners are jointly and severally liable for the obligations of the partnership and owe each other a duty of loyalty and care. As with all matters related to a partnership, the partnership agreement can specify a different apportionment of liability.

For a detailed discussion of General Partnerships, click here: http://www.lawforchange.org/NewsBot.asp?MODE=VIEW&ID=2587

A Limited Liability Partnership (LLP) starts as a general partnership. The partners then agree to change the business form into a limited liability partnership by filing a statement of qualifications with the Arkansas Secretary of State. The business must change its name to add “Registered Limited Liability Partnership,” “Limited Liability Partnership,” “R.L.L.P.,” “L.L.P.,” “RLLP,” or “LLP.”

The LLP operates generally as a general partnership, except that the partners are not responsible for the debts of the other partners, even if incurred on behalf of the partnership. However, a partner is liable for his or her own action. An LLP is frequently used by professional organizations, such as attorneys, doctors, architects, who are subject to professional malpractice claims.

See General Partnership above for a description of the operations of an LLP.


For a detailed discussion of LLPs, click here: http://www.lawforchange.org/NewsBot.asp?MODE=VIEW&ID=2587

Limited Partnerships are a special type of partnership and are common when people need funding for a business, or when putting together an investment for a specific project, such as a real estate development.

A limited partnership requires a written agreement between the business management, who are general partners, and the limited partners. Each limited partner makes an investment of funds into the partnership and receives a predetermined share of the profit.

In addition to priority in profit, tax deductions, and potential share in the success of the enterprise, the limited partner’s liability is his or her investment. Only the general partners are subject to claims, debts in bankruptcy, and lawsuits against the partnership.

  • Filings: Limited partnerships must file a certificate of limited partnership with the Arkansas Secretary of State. The name of a limited partnership must be unique and must contain the words "limited partnership" or the suffix "L.P." or "LP."
  • There are no requirements as to how a limited partnership must be capitalized, but normally, the operating agreement specifies the amount of capital each partner is to contribute. A partner’s contribution may be money, property, or services.
  • Management and Control: Absent a management agreement, each general partner has equal rights to manage the business.
  • Profit and Loss: Each partner receives a share of profits and losses proportional to the value of each partner’s contribution, unless the partnership agreement provides otherwise. 
  • Partner Liability: A limited partner’s liability is limited to his or her contribution. A general partner’s liabilities are not limited to his or her contribution.

For a detailed discussion of LLPs, click here: http://www.lawforchange.org/NewsBot.asp?MODE=VIEW&ID=2587

To become a registered limited liability limited partnership (LLLP), a limited partnership must file an application for registration as a limited liability limited partnership with the Arkansas Secretary of State.

An LLLP is operated in nearly all ways as a Limited Partnership, including defining both general and limited partners. However, in an LLLP, the general partners are not individually liable for the debts of the company. 

Also, the company name must be changed to add one of the following after the name: “Registered Limited Liability Limited Partnership” or the abbreviation “L.L.L.P.” or “LLLP.”  The word “Limited” may be abbreviated as “Ltd.”

For a detailed discussion of LLLPs, go to the following link: http://www.lawforchange.org/NewsBot.asp?MODE=VIEW&ID=2587

CORPORATIONS

A Corporation is a business organized under Arkansas law to conduct business as an artificial person. Arkansas recognizes two basic types of corporations: the “S” corporation and the “C” corporation. 

Filings: Limited partnerships must file a certificate of limited partnership with the Arkansas Secretary of State. The name of a limited partnership must be unique and must contain the abbreviation “Inc.”, the word “Incorporated,” “Corporation,” “Corp” or a similar designation.

Capitalization: There are no requirements as to how a corporation must be capitalized. A contribution may be money, property, or services.

Management and Control: Management and the operations of the corporation are proscribed in the stockholder agreement.

Profit and Loss: The corporation may retain profits or may distribute some or all of them as dividends to the stockholders. 

Shareholder Liability: A shareholder’s liability is limited to his or her contribution.

For a detailed discussion of an Arkansas Corporation, go to the following link: http://www.lawforchange.org/NewsBot.asp?MODE=VIEW&ID=2588

The C-Corporation is what most people think of when talking about a corporation.  It has stockholders and its profits are taxed at the corporate level.  Stockholders of a C-corporation are only taxed when they receive dividends, treated as income. Stocks are freely traded, and the structure can be very simple or extremely complex, depending on what the organizers want and need to run their business. 

  • Are created by filing Articles of Incorporation with the Arkansas Secretary of State.
  • May be formed for profit or for nonprofit purposes.
  • Are unaffected in their duration by death or transfer of shares by any of the owners.
  • Require more extensive record keeping.
  • Pay taxes on their profits; profits are distributed to the owners via dividends and are taxable by state and federal taxing authorities.
  • Must file annual franchise tax reports with the Arkansas Secretary of State.
  • Files returns with the Internal Revenue Service and Arkansas Department of Finance & Administration.

The S-Corporation is similar to a C-corp in that both issue stock and add an “Inc.” to their names to indicate that they are incorporated.  However, an S-corp is not taxed on its profits and does not accumulate capital.  Instead, all profits are distributed to the stockholders at the end of the fiscal year, and the stockholders are individually taxed.

S Corporations:

  • Are corporations in the view of the state and comply with state corporation laws.
  • Must have only one class of stock.
  • Must be made up of shareholders that are individuals, estates, or trusts, but not corporations.
  • Can only have shareholders that are United States citizens or residents.
  • Cannot be members of affiliated groups of corporations.
  • Are limited to 100 shareholders.
  • Are created by filing Articles of Incorporation with the Arkansas Secretary of State and then the Internal Revenue Service.
  • Must file annual franchise tax reports with the Arkansas Secretary of State.

LIMITED LIABILITY COMPANY (LLC)

An LLC is a hybrid company that shares many of the characteristics of corporations and partnerships. [PLUS SIGN]

Liability of each member is limited to the amount invested in the LLC. An operating agreement is entered into by the members defining how the LLC manages it daily affairs and makes major decisions.

The LLC was created by statute and has the following characteristics:

  • Must file Articles of Organization with the Arkansas Secretary of State.
  • Allow members to manage a company themselves or to elect managers.
  • Allow members to engage in management without risk of losing their limited liability status.
  • Do not have to disclose its membership.
  • Enjoy less regulation on record keeping.
  • May be taxed by the Internal Revenue Service as a corporation or a partnership.
  • Must file annual franchise tax reports with the Arkansas Secretary of State.
  • Are required to file information returns with the Internal Revenue Service and Arkansas Department of Finance & Administration.
  • Must have “LLC” or a similar designation in the name of the company.

Filings: Limited partnerships must file a certificate of limited partnership with the Arkansas Secretary of State. The name of a limited partnership must be unique and must contain the abbreviation “Inc.”, the word “Incorporated,” “Corporation,” “Corp” or a similar designation.

Capitalization: There are no requirements as to how an LLC must be capitalized. A contribution may be money, property, or services.

Management and Control: Management and the operations of the corporation are proscribed in the operating agreement.

Profit and Loss: The LLC may retain profits or may distribute some or all of them as dividends to the members if treated as a corporation.  If treated like a partnership, the annual profits are distributed to the members.

Member Liability: A member’s liability is limited to his or her contribution.

For a detailed discussion of an Arkansas LLC, go to the following link: http://www.lawforchange.org/NewsBot.asp?MODE=VIEW&ID=2589

OTHER BUSINESS ORGANIZATIONS

Arkansas also recognizes various other types of business structures, including:

 

Partnerships and LLCs that have a professional designation: 

Partnerships and LLCs that have a professional designation are generally reserved for organizations of professions such as doctors, attorneys, architects, etc. The designation usually includes the addition of a “P”, e.g. PLLC, PLLP.

 

"Cooperative Association":

Another business structure is the "Cooperative Association", generally formed for the purpose of providing mutual benefits to its members.

For details of a Cooperative, go to the following link: http://www.lawforchange.org/NewsBot.asp?MODE=VIEW&ID=2590.

 

For an excellent summary of the different business types in Arkansas, check out this link: http://www.lawforchange.org/NewsBot.asp?MODE=VIEW&ID=2578