Ready, set, GO! Now which entity shall you choose, partnership, LLC or corporation? An excellent question! Here we give you some considerations and basics. When you are ultimately ready, give us a call and ask us how we can help?
How should I structure my business? All businesses need to form some legal structure that defines the rights of participants within the business. In addition, this includes defining ownership, control, personal liability, duration, and financial structure. In choosing, you will want to take into account the following:
- First, How big do you want your biz to grow?
- Secondly, How much control do you want to have?
- Thirdly, How much governance do you want to provide/deal with?
- Last, What level of exposure do you want?
What does your accountant advise?
- Expected profit (or loss) of the business.
- Do you need to reinvest in the business?
- Do you need to be able to liquidate the business?
Sole proprietorship’s own all the assets of the business and all of the profits. However, on the other side of the coin they assume all responsibility for any of its liabilities or debts. Therefore, for a minimal investment and minimal organization, an LLC is much more advisable.
Benefits of a Sole Proprietorship
- Inexpensive to put together.
• Sole proprietors are in complete control.
- Profits from the business flow-through directly to the owner’s personal tax return.
• Easy to dissolve.
Negatives of a Sole Proprietorship
- Sole proprietors are exposed to unlimited liability of the business and both personal and business assets are at risk.
• Raising funds typically limited to personal loans and personal savings.
• Employee benefits are not deductible.
In a Partnership, two or more people share ownership of a single business. Therefore, the partners are similar to a sole proprietor in their level of exposure. The Partners should have a partnership agreement that provides how to make decisions, profit sharing, resolving disputes. Moreover, it gives an clear idea of how to admit future partners to the partnership, or what steps to take while dissolving the partnership.
Benefits of a Partnership
Partnership is easy to establish due to many benefits like:
- With more owners, the ability to raise funds may increase.
- The profits from the business flow directly through to the partners.
- Future partnership can be attractive to potential employees.
- Partners bring different skill sets to the table.
Negatives of a Partnership
Partners are jointly and individually liable for the actions of the other partners.
- Profits sharing.
- Potential for disputes among partners.
- Some employee benefits are not deductible.
- The partnership may have a limited duration.
Types of Partnerships that One should consider:
- General Partnership: Partners divide responsibility for management and liability, as well as the shares of profit or loss according to their internal agreement. Initially, it assumes the equal shares distribution between all the partners unless there is a written agreement that states differently.
- Limited Partnership and Partnership with limited liability: The partners have limited liability which is usually capped at their investment level. In addition, it has limited decision-making ability regarding management decision. Moreover, it is good for short term projects, or for groups looking to invest in capital assets.
- Joint Venture: Used for a limited period of time or a single project. However, if the partners in a joint venture repeat the activity, they will recognize it as an ongoing partnership. It will have to file as such, and distribute accumulated partnership assets upon dissolution of the entity.
A Corporation is a unique entity, which has a separate and existence from those who own it. A Corporation can be taxed, prosecuted, and sued. It can enter into contracts. The owners of a corporation are its shareholders. The shareholders elect a board of directors to run the company. Therefore, the corporation has a life of its own and does not dissolve when ownership changes.
Benefits of a Corporation
Shareholders have limited liability for the corporation’s debts or judgments against the corporation.
- Generally, shareholders can only be held accountable for their investment in stock of the company.
- Corporations can raise capital with the sale of stock.
- A Corporation may deduct the cost of benefits it provides to officers and employees.
- Can elect S Corporation status if certain requirements are met. Moreover, this election enables company to be taxed similar to a partnership.
Negatives of a Corporation
- Capital outlay to form a corporation is more intensive.
• Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.
• Incorporating may result in higher overall taxes. Therefore, dividends paid to shareholders are not deductible from business income.
Subchapter S Corporation
A tax election only; this election enables the shareholder to treat the earnings and profits as distributions, and have them pass through directly to their personal tax return. A shareholder working for the company must pay his/herself wages (if there is profit), and it must meet standards of “reasonable compensation”. Above all, if you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount.
Limited Liability Company (LLC)
An LLC is designed to be a hybrid of a corporation and a partnership. It provides the benefits of limited liability of its members and functionality like in kind to a partnership.
The owners are members and the governance is provided by an operating agreement or by statute should an agreement not exist. A very common business in today’s business environment.
Not sure what to choose? No problem that is what we are here for, give us a call.
Our lawyers has good experience in providing the guidance while forming a business entity. We have helped many clients in this area. Similarly, we can help you also. Contact our lawyers now or visit our office.