One of the first decisions a new business owner faces is choosing a structure for the business. Businesses range in size and complexity, from a self-employed plumber to a large corporation, and can be organized in a variety of ways.
The principal types of business organizations are Sole Proprietorships, Partnerships, Corporations, and Limited Liability Companies. Each structure has certain advantages and disadvantages. Factors such as taxes, type of business, insurance needs, number of owners, and financial needs will determine how the business should be organized. Choosing the appropriate organizational structure for your business is one of the most important decisions to make, and may require advice from an attorney, an accountant, or another knowledgeable business advisor.
The following is a brief description of registration requirements on each type of business organization, as well as the variations of each structure. It is advisable to have your legal counsel and/or accountant explain the advantages and disadvantages of each type of business organization before determining your business structure. In this chapter, you will find brief descriptions of each business structure.
Note: The information contained herein is provided for discussion and educational purposes only, and SHOULD NOT be relied on as a substitute for legal advice provided by a qualified attorney, or as accounting advice provided by a qualified accountant. Please consult the appropriate professionals for further clarification and assistance when making legal filings.
Registration: Secretary of State
Fee: $90 Paper filing (Domestic & Professional)
$115 Paper filing (Foreign) or $85 E-filing online (Domestic only)
The most complex business structure is the Corporation. A Corporation is a separate legal entity that is comprised of three groups of people: shareholders, directors, and officers. The shareholders elect a board of directors that are responsible for managing and controlling of the Corporation. Because the Corporation is a separate legal entity, the Corporation generally is responsible for the debts and obligations of the business. In most cases, shareholders are insulated from claims against the Corporation. The Corporation, as a separate legal entity, is also a separate taxable entity.
The Corporation may be taxed under Subchapter C of the Internal Revenue Code (a “C” Corporation) or Subchapter S (an “S” Corporation). Kansas law provides for comparable treatment. A “C” Corporation reports its income and expenses on a Corporation Income Tax Return and is taxed on its profits at Corporation income tax rates. Profits are taxed before dividends are paid. Dividends are taxed to shareholders, who report them as income, resulting in “double taxation” of profits, which are paid as dividends. If the Corporation meets the statutory requirements for “S” Corporation status, the shareholders may elect to be taxed as an “S” Corporation. The “S” Corporation is taxed in the same manner as a Partnership (i.e., the “S” Corporation files an information return to report its income and expenses, but it generally is not separately taxed). Income and expenses of the “S” Corporation flow through to the shareholders in proportion to their shareholdings, and profits are taxed to the shareholders at their individual income tax rate. To elect to be an “S” Corporation, a Corporation must file Form 2553 with the IRS.
A “domestic” Corporation is one incorporated within the boundaries of Kansas. A “domestic” Corporation must file Articles of Incorporation with the Secretary of State. This application requires a $90 filing fee, or $85 E-filing fee online.
A “foreign” Corporation is a business incorporated in another country, state, or jurisdiction other than Kansas. In order to conduct business in Kansas, a “foreign” Corporation must file a Certificate for Authority to Engage in Business in Kansas. This application carries a $115 filing fee. A business is required to apply for Authority to Engage in Business in Kansas/Foreign Corporation Application, if it is a place of business opening an office or distribution point, or delivering wares to resident agents in Kansas for sale, delivery, and/or distribution (K.S.A. 17-7303).
The “professional” Corporation is comprised of a single professional, or group of professionals, who file both Articles of Incorporation and a certificate from their specific professional regulatory board with the Secretary of State. Shareholders of a professional Corporation are limited to members of that specific profession.
As a reminder, it is advisable to have your legal counsel and/or accountant explain the advantages and disadvantages of each type of business structure.
There are two ways to tax a Corporation: as a C Corporation or as a Subchapter S Corporation. In an S Corporation, salaries of officers are deductible expenses, and therefore reduce the amount of income subject to corporate income tax. But they are also subject to individual income tax. If salaries become too high, the IRS may treat a portion as a dividend from the Corporation. In a C Corporation, dividends are not deductible by the Corporation, resulting in double taxation, because the same money is taxed as a part of the corporate profit, and as income to the individual. In order to qualify under the Internal Revenue Code as a Subchapter S Corporation, the Corporation must file Form 2553 with the IRS and meet the following requirements:
Note: Every Corporation must make a declaration of its estimated income tax for the taxable year, if its Kansas income tax liability can reasonably be expected to exceed $500 (K.S.A. 79-32,101). Any Corporation that began business in Kansas during this period is not required to file a declaration for this period, and no underpayment of estimated tax penalty will be imposed. Subchapter S Corporations must file a Kansas Small Business Corporation Form (Form 120S) and report income on individual income tax forms. Corporations doing business in Kansas, or deriving income from Kansas sources, must file a Kansas Corporate Income Tax Return, Form K-120. The corporate tax rate is four percent of Kansas taxable income, with an additional tax of 3.35 percent on income over $50,000 (K.S.A. 79-32,110).
Registration: Secretary of State & Internal Revenue Service
There are three main characteristics that distinguish a nonprofit organization from a business enterprise, they are:
Significant amounts of revenues are received from providers or entities that do not expect to receive either repayment or economic benefits relative to the amounts provided
There is no defined ownership that can be sold, redeemed, or transferred; nor is there entitlement to a share of the assets if the organization is liquidated
The purpose in the operation is not to produce a profit.
There are more than 25 categories of tax-exempt organizations classified under Section 501(c)(3), and Section 501(a) of the Internal Revenue Code, as well as additional types of entities under other sections of the code. Some of the major classifications include: civic leagues, religious organizations, chambers of commerce, recreation clubs, social clubs, labor organizations, libraries, museums, and voluntary health and welfare organizations.
An organization that wants to be a nonprofit entity must apply for tax-exempt status from the IRS and pay a user fee. Tax exemption is a privilege granted by Congress through the IRS. In return, nonprofit organizations are subject to a range of IRS requirements that differ from those for business enterprises. Among those is the requirement that a nonprofit organization’s activities (income and expenses) be substantially related to its exempt purpose. A nonprofit organization must limit all partisan political activity, as well as limit lobbying activities. In addition, none of the nonprofit organization’s assets can ensure benefit to any private individual.
Most nonprofit organizations are required to file an annual tax return, Form 990. If more than $1,000 of income is received, that was not related to the exempt purpose, Form 990T must be completed and taxes on those receipts paid.
The best course of action to take before starting activities is to seek competent professional help prior to assuming you are a nonprofit organization.
Registration: Secretary of State
Fee: $165 Paper filing (Domestic/Foreign or Professional) or
$160 E-Filing online (Domestic only)
A Limited Liability Company (LLC) is a business entity that combines the limited liability of a Corporation with the flexible management options of a General Partnership. Each member of a LLC enjoys liability limited to that of the investment in the business and pays taxes in proportion to ownership; thus avoiding the corporate malady of double taxation. Every LLC formed in Kansas must have the words “limited company,” or their abbreviation “LC,” “L.C.,” “LLC,” or “L.L.C.” included at the end of the company name.
A LLC must maintain a resident agent and file annual reports. Members of a LLC may be involved in the management of the business without incurring personal liability. If properly structured, a LLC may receive pass-through income tax treatment similar to a Partnership. Articles of Organization and other filings must be filed with the Secretary of State. A foreign LLC must file an application for Certificate for Authority to Engage in Business in Kansas/Foreign Limited Liability Company Application with the Secretary of State.
The professional Limited Liability Company is comprised of a single professional, or group of professionals, who file both Articles of Organization and a certificate from their specific professional regulatory board with the Secretary of State’s office. The certificate must state that each member is duly licensed and that the company name has been approved. No special wording denoting that they are different from a regular, non-professional LLC is required.
Registration: Secretary of State
Fee: $165 Paper filing (Domestic/Foreign) or
$160 Electronic filing (Domestic/Foreign)
A Limited Liability Partnership is a partnership in which a partner's personal assets are shielded from claims for negligence, malpractice, or other wrongful acts committed by other partners or the employees those partners directly supervise. A LLP does not shield partners against the partner's own acts, omissions, or other partnership obligations.
In a LLP, no registered office is required, no resident agent must be appointed. However, the address of the principal office or partnership agent must be listed in Kansas. A LLP is required to apply for a Federal Employer Tax Identification Number, IRS Form SS-4.
Registration: Secretary of the State
Fee: $165 Paper filing (Domestic/Foreign) or
$160 E-filing online (Domestic only)
In a Limited Partnership, each partner is liable for debts only up to the amount of his or her investment in the company. Under Kansas Statutes (K.S.A. 56-1a151), a Limited Partnership must be formed in writing between one or more general partners and one or more limited partners. In addition, limited partners have no voice in the management of the partnership. Limited Partnerships are ideal for property or raising capital.
Each Limited Partnership must have and maintain a registered office that may or may not be the place of business. Additionally, a Kansas resident agent must be appointed, which may either be an individual, a domestic Corporation, or Limited Partnership.
In a Limited Partnership, each partner is responsible for filing a Kansas Individual Income Tax Return (Form K-40), the same requirement as a General Partnership. A Kansas Partnership Return (Form K-65) must also be filed. A Limited Partnership Certificate must be filed with the Secretary of State, and the Limited Partnership may be required to register the Limited Partnership’s interest in securities with the Office of the Securities Commissioner.
For an explanation of taxation and forms, refer to IRS Publication 541.
The Sole Proprietorship is the most common form of business structure. A Sole Proprietorship is a business controlled and owned by one individual, and is limited to the life of its owner; when the owner dies, the business ends. The owner receives the profits and takes the losses from the business. This individual alone is responsible for the debts and obligations of the business. Income and expenses of the business are reported on the proprietor’s individual income tax return, and profits are taxed at the proprietor’s individual income tax rate.
Kansas has no state requirements to register or file the business name of a Sole Proprietorship. A self-employed person, who does not expect to have employees, is not required to apply for a Federal Employer’s Identification Number through the IRS. Form 1040 (Schedule C) must be filed with the federal government and a Kansas Tax Return with the Kansas Department of Revenue, on or before the 15th day of the fourth month following the close of the taxable year.
Note: Sole Proprietors and Partnerships are required to make estimated income tax payments if their estimated Kansas income tax, after all credits, is $200 or more. Non-residents should consider only income from Kansas sources for meeting these conditions.
At this time Professional Associations are unable to file their annual report electronically due to statutory constraints. Please return to the Secretary of State's Web site, http://www.kssos.org and obtain the form PA and submit by mail with a check or money order to the Secretary of State's office.
If you are unsure if the entity is a Professional Association please review the Articles of Incorporation. The following is a list of professions that are regulated: architect, attorney-at-law, certified public accountant, chiropractor, clinical marriage and family therapist, clinical professional counselor, clinical psychotherapist, dentist, engineer, geologist, land surveyor, landscape architect, licensed psychologist, occupational therapist, optometrist, osteopathic physician or surgeon pharmacist, physician, physician assistant, surgeon or doctor of medicine, podiatrist, real estate broker or salesperson, registered physical therapist, registered professional nurse, specialist in clinical social work, veterinarian.
Registration: Secretary of State – Optional, not required
A General Partnership is a business owned by two or more persons (even a husband and wife), who carry on the business as a partnership. Partnerships have specific attributes, which are defined by Kansas Statutes. All partners share equally in the right and responsibility to manage the business. Each partner is responsible for all debts and obligations of the business. The distribution of profits and losses, allocation of management responsibilities, and other issues affecting the Partnership are usually defined in a written Partnership agreement.
For income tax purposes, a General Partnership functions as a conduit, and not as a separate taxable entity. No tax is imposed on the Partnership itself (K.S.A. 79-32,129 et. seq.). Those carrying on business as partners are liable for tax based on their percentage of ownership, and must file a Kansas Individual Income Tax Return (Form K-40) (K.S.A. 79- 3220). Each individual partner is subject to the same reporting requirements and tax rates as the Sole Proprietor or individual. The Partnership must file a Kansas Partnership Return (Form K-65) each year to enable the State to determine who should be paying taxes relative to the Partnership.
Unemployment taxes need not be paid on the partners or for services rendered by individuals who are the children under 18 years of age, the spouse, or the parents of any partners.
General Partnerships may file different statements with the Secretary of State’s office. The filings are optional and not mandatory. The filing fee for partnership authority is $35 and the filing of any amendments to the General Partnership Agreement (such as the addition of a partner) is $35. Partnerships are required to apply for a Federal Employer’s Identification Number, whether they have employees or not.
Registration: Secretary of State
The business trust has filing requirements similar to those required of Corporations. Specific questions about establishing a Kansas Business Trust should be directed to the Corporations Division within the Kansas Secretary of State’s office.
There are no registration requirements at the state level for the establishment of a Franchise. However, some cities have occupational licensing for business establishments. Businesses are categorized according to the North American Industry Classification System (NAICS). There are no distinctions made between a business that has a national Franchise agreement and one that is independently owned.