Choosing the Right Business Structure

Starting a business involves more than choosing a name and filing paperwork with the state. The way a business is structured can affect ownership, management, liability, decision-making, and what happens when an owner leaves the business.

Depending on the circumstances, a business may operate as a:

  • Sole proprietorship
  • Partnership
  • Limited liability company (LLC)
  • Corporation
  • Other business entity or ownership arrangement

The right structure depends on the business, the number of owners, how the owners intend to operate the company, and their long-term plans.

Tasha helps business owners understand the legal differences among available structures and prepare documents that reflect how the business is actually intended to operate.

Tax treatment is also an important consideration when selecting or changing a business structure. Legal and tax issues often overlap, but they are not the same. When appropriate, Tasha works with a client's accountant or tax professional so that the legal structure and tax planning can be coordinated.

Forming an LLC Is Only the Beginning

Filing Articles of Organization may create an Arkansas limited liability company, but the filing itself does not answer many of the questions that can become important later.

An operating agreement can address issues such as:

  • Who owns the company and in what percentages?
  • Who has authority to make decisions?
  • Is the LLC managed by its members or by a manager?
  • What decisions require approval from more than one owner?
  • What happens if additional money must be contributed to the business?
  • How are profits and distributions handled?
  • Can an owner sell or transfer an ownership interest?
  • What happens if an owner wants to leave?
  • What happens if an owner dies or becomes unable to participate?
  • How can a new owner be admitted?
  • What happens when the owners disagree?

These questions may seem unnecessary when a business is new and everyone is getting along. They can become much more important when circumstances change.

A thoughtfully prepared operating agreement allows business owners to make many of these decisions before a problem arises.

Businesses With More Than One Owner

Going into business with another person can create opportunities that would be difficult to pursue alone. It can also create legal and practical questions that single-owner businesses do not face.

Co-owners should consider what happens if:

  • One owner wants to leave the business
  • An owner wants to sell an ownership interest
  • The owners disagree about an important decision
  • An owner stops contributing to the business
  • An owner becomes disabled or incapacitated
  • An owner dies
  • A new owner is added
  • The business receives an offer to be sold
  • The owners no longer agree about the future of the company

The best time to discuss these issues is usually before they happen.

Depending on the business structure and circumstances, an operating agreement, shareholder agreement, buy-sell agreement, or other governing document may establish procedures for addressing these situations.

Contracts and Business Agreements

A handshake may be enough to begin a conversation, but important business relationships should generally be documented clearly.

Written agreements can help the parties understand their responsibilities, payment obligations, expectations, deadlines, and what happens if circumstances change.

Depending on the needs of the business, Tasha may assist with reviewing or preparing agreements involving matters such as:

  • Business ownership and governance
  • Purchases or sales of business interests
  • Independent contractor relationships
  • Customer or client services
  • Vendors and suppliers
  • Confidentiality
  • Business transactions
  • Other agreements related to the operation of the business

The appropriate agreement depends on the particular transaction and the relationship between the parties. A contract should reflect the actual business arrangement rather than simply filling in blanks on a form.

Keeping Your Business Legally Organized

Business planning does not necessarily end when the company is formed.

As a business grows, the documents created at formation may no longer accurately reflect its ownership or operations. New owners may join. An owner may leave. Management responsibilities may change. The business may purchase significant property, enter new agreements, or develop plans that were never contemplated when it began.

Periodic legal review may include:

  • Reviewing ownership records
  • Updating operating or governing agreements
  • Documenting changes in ownership
  • Reviewing management and decision-making authority
  • Preparing resolutions or other company records when appropriate
  • Reviewing significant business agreements
  • Addressing changes in the company's structure
  • Coordinating business documents with succession or estate planning

Good records can help reduce uncertainty about who owns the business, who has authority to act, and what the owners have agreed to do.

Planning for Changes in the Business

Businesses change. Owners do too.

A business that began with one person may eventually have several owners. A side business may become a family's primary source of income. An owner may want to retire, sell the company, bring a child into the business, or transfer ownership to someone else.

Business owners should consider questions such as:

  • What happens if I want to sell the business?
  • What happens if my business partner wants out?
  • Can an owner transfer an interest to someone else?
  • Who could operate the business if I became incapacitated?
  • What would happen to my ownership interest if I died?
  • Does someone have the legal authority and practical information needed to keep the business operating?
  • Should the business continue, be sold, or be wound down?
  • Do my business documents and estate-planning documents work together?

Planning for change does not mean predicting exactly what will happen. It means identifying foreseeable issues and putting appropriate documents and procedures in place before decisions have to be made under pressure.

Your Business Plan and Estate Plan Should Work Together

For many small-business owners, the business is one of their most valuable assets—and often one of the assets most dependent on the owner's continued involvement.

That makes business planning an important part of estate planning.

A business owner should consider what would happen if an illness, accident, incapacity, or death suddenly prevented the owner from working.

Questions may include:

  • Who has authority to operate the business?
  • Who can access necessary business accounts and information?
  • What happens to the owner's interest in the company?
  • Do other owners have the right or obligation to purchase that interest?
  • Can ownership pass to family members?
  • Should family members own the business even if they will not operate it?
  • Do the operating agreement and estate plan provide consistent instructions?
  • Is there a plan for continuing, selling, or winding down the business?

A will or trust cannot always solve problems created by a business agreement, ownership arrangement, or beneficiary designation. Likewise, business documents should not be prepared without considering what happens if an owner dies or becomes incapacitated.

Coordinating the two can help create a clearer plan for the owner, the owner's family, co-owners, and the people who may eventually be responsible for the business.

When Should You Have Your Business Documents Reviewed?

Business documents should reflect the business as it exists today—not simply the business as it existed when it was formed.

Consider a legal review if:

  • You formed an LLC but never prepared an operating agreement
  • Your business has added or removed an owner
  • Ownership percentages have changed
  • You are bringing a family member into the business
  • You and another person own a business but have never documented what happens if one of you leaves
  • You are purchasing or selling a business or ownership interest
  • Your business has grown significantly
  • Your management structure has changed
  • Your existing agreements no longer reflect how the business actually operates
  • You are beginning succession or retirement planning
  • You are creating or updating your estate plan

Even if nothing appears to be wrong, reviewing older documents can identify provisions that no longer fit the owners' circumstances or plans.

Frequently Asked Questions

Do I need an LLC to start a business in Arkansas?

Not every business needs to operate as an LLC. The appropriate structure depends on factors such as the type of business, number of owners, management structure, liability concerns, and long-term plans.

Before selecting an entity, it can be helpful to consider both the legal consequences and the tax implications with the appropriate legal and tax professionals.

I already formed my LLC online. Do I still need an attorney?

Forming an LLC and planning how the LLC will operate are two different things.

State formation documents generally do not address many of the issues that arise between owners or during the life of a business. An attorney can review the company's structure and help determine whether additional documents are appropriate for ownership, management, transfers, decision-making, and future changes.

Do I need an operating agreement if I am the only owner?

An operating agreement can still be useful for a single-member LLC. Whether one is appropriate and what it should contain depends on the business and the owner's circumstances.

It may document the company's management structure and procedures and can become particularly important if ownership changes in the future.

My business partner and I get along. Do we really need an agreement?

A written agreement is not necessarily a reflection of distrust.

It gives the owners an opportunity to decide how important issues will be handled while they are able to discuss them cooperatively. Circumstances can change because of retirement, illness, disability, death, financial problems, or simply different plans for the future.

Can you help with a business that is already operating?

Yes. Legal planning is not limited to new businesses.

Existing businesses may need assistance reviewing governing documents, documenting ownership changes, preparing or reviewing agreements, addressing changes in management, or planning for future transitions.

Should my business be included in my estate plan?

A business owner's estate plan should take the business into account.

The appropriate planning depends on the business structure, ownership agreements, other owners, the owner's goals, and how the business should be handled if the owner dies or becomes incapacitated.

Business documents and estate-planning documents should be reviewed together so they do not unintentionally provide conflicting instructions.

Small Business Legal Guidance in Conway and Lonoke

The Law Office of Tasha Terry, PLLC works with entrepreneurs and small-business owners from offices in Conway and Lonoke.

Whether you are starting a business, reviewing documents for a company you already own, bringing in another owner, preparing an important agreement, or planning for the future of the business, legal guidance can help you understand your options and put appropriate documents in place.

The Conway office is a dedicated, enclosed private office inside The Studio Downtown at 1100 Oak Street. Meetings at both locations are available by appointment.

Call (501) 438-8123 or complete the contact form to request a consultation regarding your small-business legal needs.

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