Business Formations

Forming a business entity is exciting but must not be done haphazardly. Whether you are creating a corporation, a partnership, or a sole proprietorship, it is imperative to know and understand all of the options available at law and the legal consequences of each one.

Sole Proprietorship

A sole proprietorship is a business that is made up of a single individual seeking to generate a profit. A sole proprietorship structure may have one or more employees, separate bank accounts, and operate under a business name (assumed name). If a sole proprietor incorporates or forms a Limited Liability Company (LLC), the business structure changes in legal form even though it still maybe operated by a single owner. If the owner enters into a business relationship with another individual or entity (another Partnership, Corporation, LLC, or other legal business structure) to generate a profit, the sole proprietorship becomes a partnership.

Partnership

A partnership, as defined by the North Carolina Uniform Partnership Act, is an association of two or more person to carry on a business as co-owners for profit and for legal purposes. Partnerships require no formalities or partnership agreements except when the contract or agreement cannot be completed in one year (Statute of Frauds).

Each partner in a partnership owes a fiduciary duty to the other partner or partners to act in accordance with the partnership agreement and for the benefit of the partnership. Also, a partner must not misuse any authority granted by the partnership to enter into binding third party contracts that are detrimental to the partnership or misuse any property or money for personal gain.

A partnership can be terminated or dissolved per:

  • Partnership agreement dissolution date;
  • Partnership agreement gives one party the unilateral authority to terminate the partnership;
  • Agreement or the mutual assent of all partners

Liability

Generally, partners to a partnership have joint and several liability, meaning one partner may have to pay the full amount owed even though all the partners are liable. The partnership is liable for claims that arise out of contracts or torts that are made in the scope of the partnership and in the course of partnership business.

Corporation

Formation:

North Carolina corporations are regulated by the North Carolina Business Corporations Act (NCBCA). The NCBCA requires an “incorporator,” which is comprised of one or more individuals, to produce and file articles of incorporation with the secretary of state. The articles of incorporation must include the following:

  • Name and address of each incorporator
  • Name of corporation
  • Street address of corporation
  • Number and type of shares the corporation is authorized to issue
  • Registered agent and office
  • Duration (if not perpetual)

Other provisions may be added as long as the above requirements are met. The corporation will come into existence on a specific date or more commonly when the articles are filed with the North Carolina Secretary of State.

After the articles of incorporation have been filed, an organizational meeting must take place to elect board members. The board members are then required by the NCBCA to appoint officers and adopt corporate bylaws. Bylaws are corporate rules (laws) that are used for the purpose of internal corporate governance. Bylaws must include:

  • How many members will be on the board
  • When the annual meeting will take place
  • A description of title and duties of all of the officers

Bylaws may include other provisions such as:

  • Requirements for shareholder meeting in regard to attendance and voting
  • Specific qualifications for officers and shareholders
  • Restrictions or rules governing the transfer of shares

The mandatory requirements have to be adhered to when forming a corporation or incorporation will fail. While all the requisite formalities of forming a corporation seem simple to follow, attention to detail is important and much care must be given to adding other provisions to protect the organization, incorporator, and shareholders from possible liability.

Liability:

Generally, corporations immunize shareholders, employees and the board of directors from personal liability for actions taken in conformity with corporate direction or in furtherance of corporate business. However, the “corporate liability shell” does not shield all activities or persons working for the corporation. For instance:

  • Board of Directors and Officers have a fiduciary duty to the corporation, making decisions in good faith and in the best interest of the corporation; but, if officers or directors exceed their authority, they may be held personally liable for subsequent contracts and obligations to the extent of their violation.
  • Employees, agents and officers of the corporation may be held personally liable for their intentional torts (assault, battery, etc.) even if fulfilling corporate objectives; however, a corporation may be liable under “respondeat superior” if the employee commits a tort, other than an intentional tort, during the scope of his employment.
  • Any other liabilities that may be applicable or occur due to the breach of a fiduciary duty by an officer or director which could lead to a shareholder suit or any suit in which a party is able to “pierce the corporate veil” and personally sue an officer or director.

Limited Liability Partnership (LLP)

Formation

An LLP is a partnership used by professionals that limits the liability of the partners similar to that of a limited liability corporation. Such as:

  • An LLP has one or more general partners and one or more limited partners
  • To form a LP, a Certificate of Limited Liability Partnership must be filed annually with the secretary of state to include the following:
  • The name of the partnership
  • Name and address of every general partner
  • Date for dissolution
  • Have a registered office in the state
  • Appoint an agent for process
  • A general partner may be required to make a contribution to the partnership in the form of cash, services rendered or based on a promise to do so; however, I the event that the contribution is not paid the general partner can be held liable for the amount owed.

Liability

A partner in a LLP is not liable for the debts, obligations, malpractice of other partners or the partnership but will continue to be liable for his own errors and malpractice.

Limited Liability Company (LLC)

A limited liability corporation (LLC) provides its “members/owners” and shareholders with the same limited liability that is shared by members of a corporation but with the added bonus of being taxed like a partnership unless otherwise directed.

Formation:

The process by which to form an LLC is similar to that of a corporation with a different naming convention. A LLC, is formed by the owners which are called “members” not incorporators. The “members” must create or file articles of organization (similar to articles of incorporation) which must include:

  • The name of the business
  • The name and address of the registered agent
  • The name and address of all of the signing members to the articles of organization
  • The final date on which it will dissolve (An LLC is not perpetual like a Corp.)

Liability:

(See above – Liability for Corporations)

Professional Corporation (PA) &
Professional Limited Liability Company (PLLC)

A Professional Corperation and Professional Limited Liability Companies are the same type of legal business entity in structure as a Corperation or Limited Liability Company with the exception that the shareholders or members of a profession which is spcifically licensed and regulated by law such as medical doctors, lawyers, accountants, architects, and engineers. The governance of these legal entities and who may be shareholders or members is specifically set forth by statute.

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Areas We Serve

The attorneys of Hopper Law Firm have practiced law predominantly in Raleigh, North Carolina (Wake County) and the greater Triangle area since 1994. However, depending upon the nature of the case, we often serve clients in the surrounding counties, including: Durham, Chatham, Orange, Johnston, Franklin, Harnett, Guilford, and Cumberland.