Small Business Reading Room

Thursday, November 18, 2004

A Separate and Perpetual Existence

Sole proprietorships, partnerships, corporations, limited liability companies: these are some of the different forms you can use for running your business. There are some benefits to each of the forms, and there are some detriments.

The first two I mentioned, sole proprietorships and partnerships, don't require you to fire legal documents creating those business organizations. You might need to file a trade name, doing business as (dba) name, or fictitious name (what Delaware calls a trade name) in the county, state, or other area that the laws require where you are conducting business. Often you would do that to try to keep other people from using the same name by giving them notice that you've claimed it. If you try to open a business bank account using your business name, a bank may want you to register the trade name, too.

For all of them, you probably do need to contact your area's taxing authority, and secure a business license, too.

If you create a corporation or a limited liability company, you likely also have to take the step of filing articles of incorporation or formation with an official office in the state or province where you are located. In Delaware, the office is the Division of Corporations of the Secretary of State of Delaware. You are also required to keep careful records about the activities of the business, hold directors' meetings and keep minutes of those meetings, and pay an annual registration fee known as a franchise tax.

Are all of the extra requirements of a corporation or a limited liability worth following?

They certainly can be. I'll explain a little about one of the benefits of incorporation today, and will be adding more in days to come.

One of the features of a corporation is that it can have perpetual existence.

A major reason why you "create" a corporation by filing articles of incorporation with the government is that you are creating a legal entity that has its very own existence. It's still tied to the owners, and it still has a requirement to act responsibly and within the law. But the owners of a corporation can change, and the corporation can continue to exist.

With a partnership, if one of the general partners loses interest, retires, or dies, the partnership could very likely dissolve and the assets of the partnership will be liquidated unless the remaining people involved agree to continue the business and work together to form a new partnership. In many situations, that can be very difficult to do.

While that situation can be prepared for ahead of time with very careful planning, a corporation starts off with the idea that if someone with ownership is no longer part of the business, for one reason or another, the corporation can continue to conduct business. If a shareholder dies, the shares can pass to his or her heirs.

Corporations can have an unlimited lifespan. Corporations can also end. The shareholders can vote to terminate a corporation, or the state may dissolve it by revoking its charter, or it may merge or consolidate with another business.

This separate and perpetual existence can be beneficial for nonprofit corporations, too. A nonprofit corporation can last beyond its founders, and provide the services and public assistance it was intended to perform as long as people will join and work with it. So organizations like the Red Cross, the Sierra Club, and others can continue their missions long after their founders are unable to.

The perpetual existence of a corporation also is seen when ownership of the corporation changes through the sale of some or all of the shares of the corporation. It isn't a new business performing the same services, or providing the same goods, or fulfilling the same mission. It's the same business with some new owners. If assets, licenses, permits, deeds, and contracts were purchased or created in the name of the business, it's possible that the ownership of those assets or the nature of those legal agreements will not have changed. That's something to look at carefully when purchasing a business - what will the transfer of ownership mean in terms of a businesses assets and relationships with other businesses and customers - even when a business is incorporated.

The separate and perpetual existence of a corporation could be very beneficial to your business plans. It's something to consider and keep in mind, and talk to your attorney and accountant about when you are planning the formation of a business or when considering buying a business from someone else.

posted by William Slawski at 11:33 AM - permalink 0 comments

Small Business Reading Room

A Separate and Perpetual Existence

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