For Startups: Business Entities 101

September 14, 2021

Did you know in Mississippi there are several options for your business structure? Mississippi recognizes six different business types, and there are pros and cons for each.

 

When starting your business, one of the first major decisions you will face is selecting the business structure that fits best with how your want to operate your business. This is a decision business owners should not make alone. Reach out to your accountant and a business attorney who can advise you which entity is the right one for your business.

The following business types are recognized in Mississippi:

Sole Proprietorships:

In a sole proprietorship one person owns and operates the business. Because a sole proprietorship is not incorporated, it requires no filing with the Secretary of State. The individual owner is personally responsible for the debts and obligations of the business. Earnings are generally taxed as personal income for the owner.

General Partnerships:

Two or more persons may operate a business as a general partnership. Again, there is no Secretary of State filing requirement to form this type of entity. Many general partnerships will draft a partnership agreement to delineate the responsibilities of each partner. The partnership agreement need not be filed with the State. The assets of a partnership are owned jointly by the partners. Each partner is personally liable for the actions of the other partners including business debts, taxes and tort liability. Earnings are generally taxed as personal income to each partner.

Limited Partnership (LP):

This business entity is a partnership with two levels of partners: general partners and limited partners. A general partner makes the business decisions and controls the business. The limited partner has a stake in the company, usually through an investment of capital, but has limited control over business decisions. A Certificate of Limited Partnership must be filed with the Secretary of State.

General partners are personally liable for the debts and obligations of the partnership. Limited partners are only liable to the extent of their investment in the company. Earnings for all partners are generally taxed as personal income.

Limited Liability Companies (LLC):

A limited liability company may be owned by one or more persons. The owners are called “members.” All members may participate in managing the company or one or more members may be chosen to make decisions. Forming an LLC requires filing a Certificate of Formation with the Secretary of State.

Members of an LLC are not personally liable for the debts or liabilities of the company. Earnings may be taxed in several different ways. An LLC may have different levels of membership. The members may develop an operating agreement to govern the company. Limited liability companies generally have fewer formal record keeping requirements than corporations.

Mississippi has one of the most modern and comprehensive LLC statues in the country.

Corporations:

A corporation may be owned by one or more persons. Owners are called “shareholders.” A corporation is created by filing Articles of Incorporation with the Secretary of State. Corporations have officers elected by a board of directors that are elected by the shareholders. Corporations operate by a set of rules called “bylaws,” which are drafted by the company and adopted by the shareholders. Bylaws are not filed with the State.

Shareholders of a corporation are not personally liable for the obligations of the company. Unlike an LLC, a corporation is subject to corporate income taxes on its revenues. Profits distributed to the shareholders may be taxed as income.

An “S corporation” under the Internal Revenue Code is formed in the same fashion as a regular corporation. Sub-chapter S corporations may have some tax advantages but also must follow very specific rules. Obtaining tax planning advice when deciding to set up this type of company is recommended.

Nonprofit Corporations:

A nonprofit corporation may be formed for any lawful purpose. The Articles of Incorporation must be filed with the State and must indicate the initial nonprofit activity of the company. Nonprofit corporations are generally run by a Board of Directors and may also have members. Members of a nonprofit may not be paid, and the revenues of the company further its nonprofit goal.

A charity is a type of nonprofit corporation which solicits donations beyond its members. Special IRS rules govern charities. In addition, charitable organizations must register with the Charities Division of the Mississippi Secretary of State and unless an exemption is granted, file a report disclosing their donations and expenditures each year.

Mississippi Secretary of State’s Office, “Start Your Business in Mississippi",

https://www.sos.ms.gov/content/documents/Business/Business%20Entities%20(Clean).pdf

For more information on choosing the right entity for your business, contact our team at info@gayjoneslaw.com.