Forming A Business Entity

Business Entities

By Sterling Dunn and C. Camille NeSmith, Esq.

Business entities are formed by a partnership between two or more persons.

General Partnership

A general partnership is an association of two or more persons to carry on as co-owners of a business for profit, as stated in N.C.G.S. § 59-36. General partners are held personally liable for the business. Each partner can be held liable for any harm caused by the business or by any of the partners. General partnerships do not require formal filings with the Secretary of State.

Limited Partnership

A limited partnership is a type of partnership in which the “limited partners” are not held personally liable for the business entity. Limited partnerships require a filing with the Secretary of State (or other government entity depending on the State), which gives notice to the world that this specific entity is a limited partnership and lists the general partner(s) and the limited partner(s).

Although limited partners are not held personally liable, every limited partnership requires at least one “general partner.” This general partner is also listed on the filing done with the Secretary of State, which announces to the world or anyone viewing the record that the named individual can be held personally liable for the business. If the elements of a limited partnership are not met, by default, it is considered a general partnership.

Limited Liability Company (LLC)

A Limited Liability Company is formed when the Articles of Organization are filed with the Secretary of State along with a copy of the LLC’s Operating Agreement. The name of the LLC requires the phrase “Limited Liability Company,” or some abbreviation (“LLC”) to be included in the name to signify the entity’s status as an LLC. Owners of an LLC are called members or managers.

An operating agreement is an agreement among the members that determines the LLC’s governance structure. It also provides its operating rules and responsibilities including: the amounts of initial capital contributions by the members, distributions of profits, method of allocating profits and losses, any restrictions on membership interest transfers, withdrawal of a member, and dissolution. Members of an LLC are not held personally liable for the LLC’s assets, obligations, or any harm done by the LLC.

Corporations

A corporation is formed by filing the Articles of Incorporation with the Secretary of State and drafting Bylaws. The name of the corporation must include the word “Inc.” or “Corp.” and list an agent for service of process. The Bylaws outline the shares of the corporation, who has the authority to hire and fire, and internal policies and procedures.

De Facto Corporation

A corporation can also be formed as a “De Facto Corporation.” This type of corporation is often referred to as a “near miss.” In order for a corporation to be considered a de facto corporation, there must be: (1) a valid law under which such a corporation can be lawfully organized; (2) a good faith attempt to organize thereunder; (3) Actual use or exercise of corporate powers; and (4) good faith in claiming to be and in doing business as a corporation.

Promoters can help form a corporation. Promoters are individuals taking actions on behalf of the unincorporated entity. The promoter’s action exposes the promoter to personal liability for most pre-incorporation activity.

A corporation is run by a Board of Directors. The Board of Directors exercise the corporate power to manage the corporation and are considered “Directors.” Directors manage the business and affairs within the corporation. Directors are elected by shareholders (investors). Shareholders are owners of the corporation but do not participate in the management of the corporation. Shareholders are not liable for the acts or conduct of the corporation. Officers are individuals, selected by the Board of Directors, responsible for the day-to-day management of the corporation and are governed by the Directors.

This information provided should in no way be considered legal advice. The accuracy of any legal information provided is not guaranteed. Please seek professional help if there are concerns about specific legal issues.

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