Starting a Business in Georgia: Legal Guide to Choosing the Right Structure

Georgia Business Attorneys

Coleman Legal Group, LLC

Phone: 470-947-2471

Written by: Isha Dubey, Edited by Coleman Legal Group, LLC

Starting A Business in Georgia

Due to Georgia having a strong economic state, there is a rich variety of opportunities for starting a business. There are many crucial steps such as reserving your business name, registering with the secretary of the state, and getting a federal EIN. But above all, the most important decision as an entrepreneur is selecting a business structure. In simple terms, a business structure determines how your business is organized. This key decision can affect legal decisions made and the management style in the workplace.

In the state of Georgia, there are many types of business structures that entrepreneurs can choose from. The most common structures include sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. All these different types of structures offer different legal and financial advantages and disadvantages.

Below is an overview of each business structure:

Sole Proprietorship

This is known to be the simplest form. This process is known to be less complicated than others as the business is owned and operated by one individual without forming a separate legal entity.

Advantages of Sole Proprietorship include minimal regulatory requirements, easy formation, and total managerial control. The owner usually has the authority to make the business decisions without needing approval from other partners and shareholders.

However, there are some drawbacks along with this structure. For business debts and obligations, you are personally responsible. All your personal belongings could also be at risk including your money, car, and house. Additionally, it could be difficult to get funding from banks since there is only a single person handling the business and there is no business formation for backup.

Generally, in Georgia, a formal registration is not required for this structure, however if you want your business to be under a different name legally, a trade name (DBA) must be registered with the county clerk’s office.

Partnerships

General Partnership (GP)

A general partnership involves two or more people running a business together and agreeing to have an equal share in the firm. There is usually a fair split between the profits, losses, and agreements. While this structure does not require you to register with the state, it is always smart to have a written agreement about the functionality of the business.

Partnerships are usually easy to start as there are rarely any registration processes through the state. An advantage includes shared responsibility to reduce work overload and a chance to combine skills and experiences which can lead to rapid growth in the business.

One disadvantage is that partners have unlimited personal liability, putting each partner at risk. This means when legal complications such as debt occur, both are personally held responsible even though it was caused by the other partner.

Additionally, Partners are responsible for handling all relevant state and federal tax obligations.

Limited Partnership (LP)

A Limited Partnership (LP) is a business structure that involves both general partners and limited partners. It is made up of two or more partners in which the general partner oversees and takes full personal liability for obligations, whereas the limited partner does not partake in managing the business and contributes capital.

In a LP, the business does not have to pay income and net worth taxes. Instead, each partner is taxed upon his or her share of the profits.

The first step you need to take is to determine if you are a foreign or domestic business entity and select a registered agent for your company. The agent is the person to any service process or official communication on behalf of the business.

In most cases, the business name must comply with Georgia’s requirements, which is including Limited Partnership in the name or its abbreviation (L.P.).

Additionally, it is essential to register an LP with the state. This process could be done online, by mail, or in person. You will receive your certificate of the LP within a specific processing time.

Partnership Agreements

Although Georgia law does not require partnership agreements for Limited Partnerships, it is always recommended to avoid conflicts in a business.
The agreement outlines how the partnership will operate, thereby protecting everyone’s interest and output.

Some key aspects to include in the agreement are profit and loss distribution, decision-making within the partners, dispute resolution, and exit strategies. These ideas could be extremely helpful to have in case of unexpected situations arise.

Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a corporate structure that combines the benefits of a corporation and a partnership. It protects its owners from being personally pursued for repayment of the company’s debts or liabilities.

This business structure offers many advantages. “Limited Liability” means that the owners are not personally responsible for the business’s debts, which can reduce the risks of going bankrupt. Along with that, profits and losses pass through members, meaning the LLC does not pay federal income taxes.

On the other hand, some disadvantages include annual registration fees and individual taxes, which can lead to loss of liability protection.

To legally form an LLC in the state of Georgia, there are certain steps to take. First, you must submit the Articles of Organization to the Georgia Secretary of State, which must include all official details of the business. This is typically a $100 one time starting fee and a $50 annual renewal fee for LLCs/corporations. Then, you must obtain an Employer Identification Number also known as EIN. The EIN is essentially the social security number for the business and gives it an identity. Along with that, the business must pay its annual registration fee which avoids the loss of legal right to operate.

Operating Agreements

Operating Agreement is an important document that essentially presents how the LLC will be operated. It guards its members through the presentation of expectations and rules. The agreement represents the relationship of members, the structure of management, as well as profit and loss distributions.

Some key provisions include member contributions, voting rights, and profit and loss distribution. Georgia Law makes operating agreements optional, although it is strongly advisable to have one, at least in the case of multi-member LLC. In absence of one, rules on state default come into play and these indeed might not be on the minds of the members. Regardless of the number of members, it is helpful to have written rules that can prevent calls to confusions and a court battle in the future.

Corporation (C-Corp)

C-Corporation is a legal business structure that is registered independently as a corporate entity in which it is owned by the shareholders. This division offers benefit of liability protection and enables the corporation to make contracts, to sue or being sued, to own assets irrespective of its shareholders.

One advantage of this structure is limited liability. This comes in favor to shareholders since they are not personally responsible for debts and legal issues. Along with that, Corporations can issue stock allowing them to raise capital easily.

Unlike other structures, the corporation pays taxes on its income, and shareholders pay taxes on the bonuses they receive putting overall economic activity in a disadvantage.

To legally form an LLC in the state of Georgia, there are certain steps to take. First, you must submit the Articles of Incorporation to the Georgia Secretary of State, which must include all official details of the business. This is typically a $50 fee for LLCs/corporations. Then, you must obtain an Employer Identification Number also known as EIN. The EIN is essentially the social security number for the business and gives it an identity. Along with that, the business must pay its annual registration fee which avoids the loss of legal right to operate.

C-Corps have strict management structure: Board of Directors, Corporate Officers, Shareholders. The Board of Directors are elected by the shareholders, and they ensure the business’s responsibilities and daily operations. The Corporate Officers have significant standing in the business as they carry out the board’s directions and handle different departments such as finance, operations, etc. Shareholders are usually not involved in daily operations, but rather exercise their input through legal matters such as voting and buy-sell agreements.

Shareholders and Shareholder Agreements

Shareholders are ones who hold shares in a business and own the corporation. While they do not have to be present in the day-to-day management in the company, they have the right to vote on corporate matters and right to access certain company information. Along with that, they oversee dividends policies for the business, such as determining if they are mandatory or optional.

S-Corporation

S- Corporations belong to one of the forms of taxation which enables other qualified corporations to apply all their transactions (such as corporate income, losses, deductions and credits) directly to the shareholders on federal taxes.

To be considered as an S-Corporation, you must be a domestic corporation, no shareholders other than U.S citizens or permanent residents, a limit of 100 shareholders, and a single level of stock. The corporation too should not be a bank, an insurance company or an international organization.

There are numerous advantages associated with S-corps among them being the possibility of having pass-through taxation, whereby, S-corps are not required to pay Federal corporate level income. This is important because, the generated profits will go through shareholders and through their separate tax returns, thus effectually avoiding the effect of double taxation. The other item is the self-employment tax savings. The payroll taxes will be applied only on the wages paid to the shareholder-employee, not on all profit.

The strong ownership regulations, such as a limit in shareholders, one sort of stock and experiencing greater IRS examination are the drawbacks of such corporation.

The process of how it can be done in Georgia goes as such, create a C-Corp first, and then fill in the IRS Form 2553 to convert it into an S-Corp.

Knowing which structure to choose

One of the most important decisions you will make when putting up a business in Georgia is about how to choose the right business structure. The type of structure you adopt determines your liability to the laws, taxation, decision making process and the ease to expand your business.

One thing you should look out for is liability assurance. If you want to avoid personal, then it is important to note that formations such as LLCs and corporations will protect your assets, while sole proprietorships and general partnerships can put them at risk.

Something else worth nothing is the tax treatment. Taxation of different structures is different. For example, LLCs have a flexibility as to their taxation, whereas S-Corporations and C-Corporations have detailed terms of taxation, which may be beneficial to a particular business.

Finally, growth and funding targets is another factor to watch out for. With setting up targets, you will be able to understand how you want your business to expand and how you plan to get money for it. C-Corporation might be the best choice since a C-Corporation can sell shares and venture capitalists are more likely to invest in it.

On a final note, the business structure you choose can have a considerable impact on your business’s success. Be sure to think about your long-term accomplishments and set your business up for growth right from the start.