Business Law FAQs

I Am Starting a New Business. Can You Help Me Choose a Business Entity?

Absolutely! Your choice of business entity, such as sole proprietorship, limited liability company, or corporation, can affect liability issues, how many partners or shareholders your business can have, the equity structure of the business, its control and management, as well what kind of funding the business may be eligible for. It's important to choose the best business entity for your needs from the start, so always consult with an experienced Wisconsin business attorney to get your company off the ground right.

What is the difference between buying a "going concern" and just buying the assets of a business?

When you buy a "going concern," you purchase the entire business, including all of its assets and liabilities, and continue to operate it as it was operated before the sale. The only real change is the change in ownership. You get the benefit of the business's goodwill, or reputation; you are obligated under its contracts; you are entitled to its receivables. Normally, you acquire the business entity, either through the purchase of all of its units of membership in the case of a limited liability company, or all of its shares of stock in the case of a corporation. Because you are taking on the liabilities and contractual obligations of the business, it is very important to do due diligence and to have a carefully drafted purchase contract.

In an asset purchase, the selling entity remains intact, but you acquire some or all of its assets. You may add these assets to a business that you already own, or you may want to form a new business entity to hold them. Generally, you are not liable for the selling entity's liabilities, but there are some exceptions. For example, the Wisconsin Department of Revenue can assess successor liability for certain types of tax owed by the seller, such as sales tax, against the buyer, even in an asset purchase. Additionally, the assets could be subject to liens.

What are Articles of Organization or Articles of Incorporation, and Why Do I Need Them?

The articles of organization (for a limited liability company) or articles of incorporation (for a corporation) is a document filed with the state government in order to formally create the business entity. The articles include such information as the name of the company, its street address, its agent for service of process, and the type and amount of units (for a limited liability company) or stock (for a corporation) the company is issuing. The only way to start a new limited liability company or corporation is to submit articles to the state. After the articles have been accepted and filed by the state, the entity must file an annual report with the state each year in order to remain in good standing.

What is an Operating Agreement and Bylaws, and Why Do I Need Them?

Bylaws include the rules and regulations that govern a corporation; an operating agreement fulfills a similar function for a limited liability company. These documents may contain information about the organization's structure and ownership, management, voting, and rights and responsibilities of members or directors. While these documents, unlike articles of incorporation or organization, need not be filed with the state, they are still important. In addition to being a blueprint for the operation of the organization, banks and lenders may expect to see them when opening accounts or providing financing for the organization. Prospective investors will want to examine them as well.

What is an Employer Identification Number (EIN)/Tax Identification Number (TIN)?

An employer identification number (EIN), also known as a tax identification number (TIN), is a nine-digit number assigned to a business entity operating in the United States for identification purposes. Like a Social Security Number for an individual, an EIN is a unique identifier. An EIN is obtained from the IRS and its main purpose is to facilitate the payment of taxes and filing of tax returns by the business entity. However, an EIN is also required for other purposes. For example, financial institutions will not permit a business entity to open a checking or savings account without an EIN.

Will My Business Have to File a Separate Tax Return?

It depends on the business entity you have chosen. All corporations, regardless of whether they had income for the year, must file a tax return. Limited liability companies (LLCs) are usually treated as "pass-through" entities; that is, all income passes through the business and is taxed on the owner's personal income tax returns. A single-member LLC is thus treated like a sole proprietorship (another "pass-through" entity). Because Wisconsin is a marital property state, an LLC that has only two members who are married to each other can also be treated like a sole proprietorship for income tax purposes. This is called the "disregarded entity" rule.

Co-owned LLCs that have two members who are not married to each other, or that have three or more members, are treated like partnerships, with each owner paying taxes on the percentage of income equivalent to their ownership share. Though a co-owned LLC doesn't file a tax return, it must file IRS form 1065, to confirm that partners are correctly allocating the business's income.

You can also elect to have an LLC treated as a corporation for tax purposes. If you think your LLC will have significant income, this may be a desirable option.

How Should I Sign Business Agreements, Contracts, and Other Documents?

Your signature should convey to the other party or parties to the document that you have the authority to sign on behalf of your business entity, and that you are in fact doing so, rather than signing on your own behalf. If you fail to indicate that you are signing in your capacity as an officer, member, or manager of the company, you could be exposed to personal liability if something goes wrong. A proper signature block for a corporation looks like this:

Native Flowers, Inc.

By:______________________________ (your signature goes on this line)
Mark Jones, President

A proper signature block for a member-managed limited liability company looks like this:

Wild Widgets, LLC

By:_____________________________ (your signature goes on this line)
Amy Smith, Member

A proper signature block for a manager-managed limited liability company looks like this:

Catering and More,LLC

By:_____________________________ (your signature goes on this line)
John Doe, Manager

Typically, for a corporation, you would sign with your name and title, such as "Mary Doe, President". For a limited liability company, you would sign with your name and title, such as "John Doe, Manager," or "Jane Smith, Member." In addition, the entity's name should be above your signature line, and the word "By:" should precede your signature.

It is a good practice to check any invoices and contracts you receive to make sure that they are in the name of your business entity as opposed to your personal name or any "doing business as" name, that they are mailed to the business' address, and that any signature required is in the above format. If a vendor or contractor does not know that your business is an entity, as opposed to a sole proprietorship, you could be personally liable to them. It is your responsibility to make sure they are aware of your business entity.

Do I Have to Use "LLC,""SC," "Inc.," etc. in My Business Name?

It's advisable to do so. Using the proper abbreviation gives a clear signal to clients, customers, vendors, and other entities dealing with your business that it is an entity. If it is not clear that the business is a limited liability company or a corporation, in the event of a dispute, a court might find that the owners entered into a transaction in their individual capacities. This could expose you to personal liability. Standard business documents, such as letters, invoices, contracts, and business cards, should contain the full business entity's name, including the proper abbreviation. You may have a little more leeway with promotional items like pens or water bottles, but you should discuss any such exceptions with your attorney.

My Business is a Limited Liability Company. Do I Need Business Liability Insurance?

Yes. A limited liability company protects your assets as an individual owner of the business in the event the business is sued or owes a debt. However, business liability insurance is necessary to protect any assets owned by the business. A good business liability insurance policy will also pay your legal fees or costs of defense in the event that your business gets sued.

I've Heard That Payroll Taxes are "Trust Fund Taxes." What Does That Mean?

As an employer, you pay your employees, but you withhold part of their pay for things like their share of Social Security and Medicare taxes, and, of course, their income taxes. Although this money may be parked in your business' bank account until you pay it to the U.S. Treasury or the Wisconsin Department of Revenue, it does not legally belong to you or your business. You are holding it in trust for your employees and you have a fiduciary obligation to pay it to the government. If you do not do so, you and your business can be held liable and can be subject to severe penalties, including imprisonment. In collecting "trust fund taxes", the government is allowed to "pierce the corporate veil" and go after you personally, even though your business is a limited liability company or corporation.

If you have more questions about starting or operating a business in Wisconsin, we invite you to contact our law office.

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