If you are starting a business, selecting the correct business structure is one of the first decisions that you must make. In general, you are free to operate your business using any type of entity that you wish, but be aware that the choice you make triggers a number of compliance responsibilities.
There are six major business structures:
- sole proprietorship
- general partnership
- limited partnership (LP)
- limited liability partnership (LLP)
- limited liability company (LLC)
- business corporation (Inc.)
Common law business entities
The first two types — the sole proprietorship and the general partnership — are what are known as “common law” entity types. This means that you don’t have to file any paperwork with a state in order to operate as a sole proprietor or as a general partnership. If you are the sole owner of a business and you take no action to form another type of entity, you are operating as a sole proprietor. If you are in business with other people and you take no action, you are operating as a partnership.
The remaining four types — limited partnerships (LPs), limited liability partnerships (LLPs), limited liability companies (LLCs) and corporations (Inc.) — are “statutory entities.” A statutory entity’s existence and characteristics are governed by state laws.
Operating as a statutory entity provides some level of asset protection for the owners. (The degree to which an owner’s assets are protected depends upon the type of entity and the specific state’s laws.)
However, in order to obtain this state-sanctioned shield, you must comply with the state’s registration laws.
All states require statutory entities to do the following:
- File documentation with the state disclosing information about the business
- Appoint and maintain a Registered Agent within the state
The type and amount of information that must be disclosed in the initial application for formation or foreign qualification with the state (such as Articles of Incorporation, Articles of Organization, or Certificate of Authority), as well as in the ongoing annual report filings, varies depending upon the state and type of entity.
Registered agent requirements are more consistent across states
States are more uniform when it comes to Registered Agent requirements. Some states refer to this as an “agent for service of process”, “resident agent” or “statutory agent.” Regardless of the name, the requirements and functions are the same.
All states require that any formal entity (corporation, LLC, LLP or LP) designate a Registered Agent that -
- Is an individual resident of the state or domestic or qualified foreign business entity
- Has a physical address — not a post office box — within the state. The Registered Agent’s location is also known in some states as the registered office.
Most states also require that the Registered Agent be available during normal working hours throughout the year in order to receive service of process and other official court and government documents.
The requirements of state residence, a physical address, and availability must be considered when the corporation, LLC, LP, or LLP selects its Registered Agent. The temptation — particularly if the state of incorporation or formation is the primary business location — is to simply have the company manager or officer serve as the Registered Agent.
While this is possible, it is not always advisable. The documents delivered to a Registered Agent are often highly important, and they generally require action within a short period of time. If that company's designated officer is extremely busy, the mission-critical document could get overlooked.
Or, if the designated officer is away on business or vacation, the process server (the person who delivers that summons that commences a lawsuit) may just leave without serving the document, and the plaintiff (the party filing the lawsuit) may be able to serve in a manner less likely to result in the statutory entity receiving time notice. This could have the unfortunate result of a default judgment against the company.
It behooves any statutory entity to do more than just meet the statutory minimum. It is advisable to have an experienced professional Registered Agent service provider serve as the company’s Registered Agent. This helps ensure that the person receiving the documents will deliver them to the appropriate individuals within the company in a timely manner.