The Different Types of Arkansas Business Entities

Choosing the right structure for your business can have massive implications, impacting everything from tax rates to management capabilities and administrative requirements.

Business Entity Options in Arkansas

Arkansas entrepreneurs have an abundance of opportunities, with the right to establish a simple proprietorship or a comparatively complex corporation. However, every business entity has its own advantages—and risks.

Sole Proprietorships and Partnerships

Sole proprietorships and partnerships are owned and operated by individuals or joint partners, respectively. Both business arrangements are relatively informal: they are easy to establish, do not require the payment of extensive filing fees, and are not required to implement any particular management or administrative structure.

However, while many family-owned businesses operate as sole proprietorships and partnerships, these simple ventures do little to shield their owners and operators from the risks of liability.

If an employee, a customer, or even a visitor is injured on the premises of an unprotected business, the owners themselves could be held liable for any resulting damages—risking not only their hard work but their retirement savings and family home. 

Limited Liability Partnerships

A limited liability partnership, or LLP, is similar to a general partnership, allowing its partners to take an active role in the everyday management of the business while offering some liability protection. However, LLPs do not provide wide-ranging liability protection: instead, they simply shield each member of the partnership from the potential misconduct of other members.

Limited liability partnerships have other benefits. For example:

• LLPs are considered pass-through entities and are exempt from paying federal corporate income tax.
• LLPs are treated as ordinary partnerships by the Internal Revenue Service.
• LLPs can easily withstand change, as partners may enter and exit the business without significantly disrupting its core operations.

Limited Liability Corporations

A limited liability corporation, or LLC, occupies something of a middle ground between simple partnerships and comparatively complex corporations. Since LLCs are comprised of individual members, they can be managed directly by their owners and managers. They are also “pass-through” entities insofar are exempted from having to pay federal corporate income tax.

While limited liability corporations are relatively easy—and inexpensive—to form and maintain, their greatest advantage may relate to liability: if an LLC goes into debt or is taken to court, its owners’ personal financial assets will not be endangered.

However, Arkansas requires that LLC owners:

• File Articles of Organization with the Arkansas Secretary of State
• File annual franchise tax reports with the Arkansas Department of Finance and Administration
• File information returns with both the Internal Revenue Service and the Department of Finance and Administration

S Corporations

An S corporation is an entity that has chosen to be taxed under Subchapter S of the Internal Revenue Service’s Tax Code. Despite the name, a business’s categorization as an S corporation exclusively affects its tax status: just like LLPs and LLCs, S corporations are pass-through companies and therefore exempt from federal corporate income tax.

Small business owners and independent contractors often form S corporations because this entity allows owners to report their profits and losses on their personal income tax returns.

However, S corporations face significant limitations. For example:

• S corporations can have only one class of stock.
• S corporations cannot have more than 100 shareholders.
• Shareholders can only be U.S. citizens or residents.

Corporations

A corporation is a business entity that has the authority to act as an individual. Since the actions of a corporation are legally distinct from that of its owners and shareholders, the corporation has its own rights, privileges, and liabilities. A corporation can:

• Buy and sell property
• Enter into contracts
• File lawsuits

However, corporations are a complex form of business organization and are subject to stringent requirements at both the state and federal levels. Corporations, for instance, must maintain expensive operational records, pay taxes on their profits, and file returns and franchise reports with the Internal Revenue Service and the Arkansas Department of Finance and Administration.

Contact Quraishi Law & Wealth Today

Identifying the right structure for your business entity can prove challenging, especially if you have unanswered questions about the effect incorporation will have on your tax rates, personal liability, and long-term aspirations. Fortunately, you do not have to navigate the complexities of state and federal law by yourself. Send Quraishi Law & Wealth a message online, or call us today at 870-275-4304 to schedule your initial consultation.