Starting a New Business in Arkansas
Starting a business is a lot like having a child. You’re there when it enters the world; you help it grow through the years, and taking care of it is one of the hardest things you will do. The early years are often difficult and full of sleepless nights, but ultimately, the experience can be extremely rewarding.
And the similarities don’t stop there. Sometimes children and businesses happen accidentally, and if we nurture them, their growth can be both challenging and rewarding.
Your Business Needs a Plan
Of course, children are not businesses, and businesses are not children – although businesses are sometimes considered legal persons under the law. While an unexpected child can be a blessing, prospective business owners really shouldn’t create a new business without first creating a plan.
This article provides descriptions of the types of businesses you can form in Arkansas along with an overview of the legal considerations you should keep in mind when starting a new business in Arkansas.
We will answer the question, “How to start a business partnership in Arkansas?” However, we strongly recommend that potential entrepreneurs consult with their accountant to ensure they choose the best tax election for their particular situation and to address any other tax matters.
How to Start a Business Partnership in Arkansas
Simple business partnerships can be formed without formal documents when two or more people carry out the business and share profits; however, a more complex partnership may require putting legal documents into place as well as other tax considerations. Additionally, to potentially shield personal assets from business liabilities, it’s always a good idea to put certain protections in place.
Here are the general steps for starting a business or partnership in Arkansas:
- Determine your product or service: The most successful businesses understand the needs of their community and structure their enterprises to fulfill those needs.
- Decide which type of business you want to form: There are many types of business formation structures. Understand the legal structure that best fits your plan is critical.
- Select a name: Your business name must be unique. You can check for available names through the Arkansas Secretary of State Business Entity Search.
- Create your business entity: You may or may not need legal documents for your business, but The Law Group of Northwest Arkansas PLLC can help figure it out and create/complete any legal formation documents you may need.
- Obtain Arkansas licenses and permits: The Law Group can also help you obtain your Employer Identification Number (EIN), tax registration number, health and safety licenses, and other necessary permits.
- Select a business location: Understanding local zoning and permit requirements are key to choosing the right location for your business.
- File taxes: All businesses in Arkansas must report income and expenses through tax filings.
- Get business insurance: Protect your company and your personal assets with insurance.
- Open a business bank account: Keep a separate bank account for your business to track income and expenses.
Business Partnership Resources
The Arkansas Secretary of State has a resource for new businesses that provides information about business partnerships including a downloadable booklet about doing business in Arkansas to help you get started.
The Arkansas Small Business and Technology Development Center also has a convenient business startup overview with information about starting a business in Arkansas including comprehensive information about dealing with licenses and permits, taxes, legal structures, funding, business planning, and home-based businesses.
They also provide a list of standard dos and don’ts for starting a business and frequently asked questions for people who may be entertaining the idea. Additionally, there are a number of other statewide and regional resources available for entrepreneurs, such as the Arkansas Economic Development Commission, Startup Junkie, and SCORE Northwest Arkansas.
Types of Businesses
The type of business you decide on will obviously depend on many factors, including discussions with your accountant. The following overview of business types can help you identify the right structure for your business and provides information you’ll want to consider for each.
A sole proprietorship can have only one owner — YOU. There is no separate business entity when you do business as a sole proprietor. All business is conducted in your name; however, you can file a form with the Secretary of State allowing you to use a name for the sole proprietorship other than your name. Because you, alone, are the owner of your sole proprietorship, you are also personally responsible for the sole proprietorship’s debts and other liabilities.
Things to Consider When Forming a Sole Proprietorship
- Structure is straightforward and easy to form;
- Owner is personally liable for business debts;
- You do not need to file state or local documents to create a sole proprietorship;
- Though not recommended, owners of sole proprietorships can legally intermingle personal and business funds;
- Owners of sole proprietorships only have to pay personal income tax and can usually deduct business losses;
- Record-keeping and tax preparation are generally inexpensive and relatively simple;
- Equity contributions can only be made by a single owner; and
- Sole Proprietorships can lead to tricky estate issues if the owner passes away (i.e. it may be hard to agree on the business’s fair value or who can claim the businesses assets or debts).
General partnerships are easily formed between two or more people carrying on a business and sharing profits.
Like a sole proprietorship, you do not have to file state or local documentation to create a general partnership, but potential business partners should be cautious because general partnerships are subject to more laws and regulations than sole proprietorships.
Considerations for a General Partnership
- General Partnerships are easy to form and do not require filing forms to create;
- Each general partner in the partnership is personally liable for the business’ debts and other liabilities;
- Partners only pay personal income tax and can generally deduct business losses;
- Record-keeping and tax preparation are generally inexpensive and simple;
- A General Partnership does not allow passive investors;
- It is often difficult for a general partnership to continue or transition when a partner leaves the business;
- Partners must pay taxes on all money earned in a given year, even if it was not distributed in that year; and
- Each partner’s income is subject to employment taxes.
Limited Liability Partnership
Not to be confused with LPs or LLLPs, a Limited Liability Partnership is much the same as a general partnership except LLP partners are not subject to personal liability for the partnership’s debts. This makes the LLP an attractive, informal type of business.
Considerations for a Limited Liability Partnership
- The same considerations as for general partnerships apply to LLPs; however, if managed properly, partners are generally not personally liable for the LLP’s debts and other liabilities.
Limited partnerships have two partners – a general partner and a limited partner. The general partner manages the business while the limited partner generally acts as a passive investor in the partnership.
Considerations for a Limited Partnership
- Partners only pay personal income tax and can generally deduct losses; however, deducting losses may be more difficult for the limited partner;
- At least one partner must be personally liable for the business’ debts and other liabilities;
- Taxes can sometimes be structured to avoid employment taxes;
- LPs can have passive investors; and
- LPs are more suited for a smooth transition when a limited partner quits, but complications can arise if a general partner quits.
Limited Liability Limited Partnership
Just as an LLP is a slightly modified general partnership, an LLLP is a slightly modified LP that protects all general and limited partners from personal liability for the business’ debts. An LLLP is one of the newest businesses structures in the U.S., and many states do not recognize an LLLP as a legal business entity. However, LLLPs are valid business types in Arkansas.
Things to Consider When Forming an LLLP
- LLLPs have the same considerations as LPs, except that both general and limited partners generally are not personally liable for the LLLP’s debts; and
- Out-of-state courts may not recognize LLLPs conducting business in their state and may find that the LLLP is an LP or some other form of partnership, instead.
Limited Liability Company
LLCs are now commonplace nationwide. The LLC business formation was designed to be a flexible hybrid that combines the strengths of both partnerships and corporations. For that reason, it remains a very popular type of business structure.
Considerations for Limited Liability Company Formation
- While LLCs are more informal, they can be more expensive and time-consuming to create;
- Generally, if managed properly, neither members nor managers are personally liable for the LLC’s debts;
- Members and owners must pay personal income tax and can usually deduct business losses (unless there are more than 500 members);
- LLCs are usually taxed as a partnership, but can elect to be taxed as a corporation;
- LLC is a flexible management structure that can be made to resemble corporate or partnership structures;
- Members must pay taxes on all money earned in any given year, even if the money was not distributed in that year;
- Members’ income may be subject to employment taxes;
- Accounting can be more complicated and expensive than for other business types;
- Management of the business may be vested in members or managers; and
A corporation is one of the oldest business forms and is generally the best type of business for those seeking public investors. Corporations, however, are the most formal type of business and require extensive recordkeeping, an organized structure, and regular meetings.
Considerations When Developing a Corporation
- Corporations are formal and inflexible and have clear corporate law, unlike LLCs;
- Passive investors (shareholders) have well-defined rights and responsibilities;
- When managed properly, shareholders, managers, and directors are generally not subject to personal liability for the corporation’s debts;
- A corporation is the preferred business type when seeking outside investors;
- Though a small private corporations may be the right choice for some, the corporate structure is not always suited to small and startup enterprises; and
- Corporate income is generally taxed twice, first as corporate income and then as personal income distributed to shareholders; however, smaller corporations can sometimes elect to avoid corporate taxation.
A Knowledgeable Lawyer Can Help You Form a Business in Arkansas
Most business structures have strict requirements for proper formation, but, as with any area of law, there are exceptions to many of the rules. That is why it is a good idea to consult with a lawyer, an accountant, or another business formation specialist before launching a business.
The Law Group of Northwest Arkansas PLLC’s team of professionals understand the intricacies of each of type of business and has the experience to help your business get up and running. Let us worry about the technicalities while you enjoy watching your business sprout and grow!
- Professor Carol Goforth, University of Arkansas School of Law, Business Planning: Introduction (2017) (previously referenced material from Business Lawyering Skills class).
- Arkansas Secretary of State website
- Arkansas Small Business Center and Technology Development Center
- Arkansas Economic Development Commission
- Startup Junkie
- SCORE Northwest Arkansas