One of the most important aspects of owning and running a business is the choice of business entity. Making the proper decision will go a long way toward determining whether your business succeeds or fails, as it impacts crucial issues such as personal liability, taxation, ownership structure, distribution of profits (or losses), and many more.
At the Law Office of Mark C. Metzger, we can help you choose and file the entity best-suited to your particular needs and goals. We can handle all aspects of your entity’s formation on a flat fee basis if you so choose. Contact us today to learn more about how we can help you in this area of business law.
Here is a brief introduction to various business entities.
Sole Proprietorship
This is the simplest form of business ownership. As sole proprietor, you serve as the owner and operator of the business, with unlimited responsibility for all profits, losses and debts. Sole proprietorship can minimize your startup and operating costs, and make the business relatively easy to manage. Unfortunately, these advantages are typically offset by a number of factors. For example, as the sole owner of the business, you may have trouble raising capital or finding and keeping qualified employees. Liability issues are an even greater problem. As sole owner, your personal assets, not just your business assets, are at risk from lawsuits, business debt, losses, and more. In essence, you have full control of the business, but you also bear full responsibility for it.
Corporation
Corporations are formed under civil state law and considered separate legal entities from their owners. They are the most common form of business entity. Why? In addition to providing limited liability, they offer a flexible ownership and management structure, as well as the opportunity to issue stock, which can be easily transferred. You should know that if your business is not incorporated and maintained properly, you may be subject to personal liability. This is why it is extremely important to consult an experienced business entity formation lawyer to incorporate your business. A business attorney can also help you adhere to the stringent formalities demanded by state law.
There are two primary types of corporations that are distinguished primarily by their tax considerations. Most large and publicly held businesses are C-Corporations. They are subject to what is known as double taxation if dividends are paid. C-Corporations pay taxes on all profits before dividends are paid to shareholders. Shareholders must then pay taxes on their individual returns. An S-Corporation, on the other hand, allows you to avoid double taxation and protect shareholders from liability for any corporate debt.
Partnership
There are two basic forms of partnership, general partnership and limited partnership. In a general partnership, you and your partners agree to share profits, losses and any potential liability. In the case of a limited partnership, one or more of the partners is not involved in running the business, but provides capital and shares in profits or losses. A limited partner’s liability is restricted to his or her investment in the business. An important difference between a partnership and a limited liability company or corporation is that every partner is responsible for losses, liabilities and debts. In addition, partnerships are governed by state law, so it is critical to be aware of state regulations before forming and filing a partnership.
Limited Liability Company
A limited liability company combines the flexibility of a partnership with the protection provided by limited owner liability. Typically, it also requires less effort to maintain than a corporation. However, a limited liability company still has to file and maintain documents with the state to protect its status. Owners of income property, in particular, may benefit from a limited liability company because it protects them against claims by third parties, such as tenants.
To learn more about entity formation, contact us for an initial consultation. We can select, design and implement the entity that is right for you.