Creating the proper legal structure for your business is an important decision. A Limited Liability Company (LLC), a Corporation, a General Partnership, a Limited Partnership and a Sole Proprietorship all offer the business owner(s) different types of protections and advantages.
So which one is right for you?
Below is an overview of some possible benefits of each type of business structure, to help you decide:
A limited liability company (called an "LLC") is a legal entity that, in the eyes of the law, exists separate and apart from its owners. The owners of the LLC are called "members" (as compared to a corporation, where the owners are referred to as "shareholders"). An LLC is formed by filing with the proper state governmental authority (usually the Secretary of State) articles of organization (or the equivalent under the laws of a particular state) and all filing fees are paid. Some state laws may impose additional pre or post-creation requirements as well.
There are three primary areas of an LLC that are attractive business owners:
* The LLC, like a partnership, is given a pass through tax treatment, i.e. profits and losses are reported on each owner/member's individual tax return;
* The LLC, like a corporation, provides liability protection for the members (assuming that potential debts and obligations are incurred in the name of the LLC and not the members individually), which means that creditors can assert their claims only against LLC and not directly against the members (again, assuming that the LLC is properly operated and the members do not personally guarantee any obligation of the LLC); and
* The LLC provides flexibility in management (as compared to the relatively rigid corporate structure) and other issues while preserving the 2 advantages listed above.
A for-profit corporation is a business structure formed by filing articles or incorporation (or similarly named documents) with the appropriate state agency (again, usually the secretary of state). A corporation is recognized as being separate and apart from its owners. (The owners are called "shareholders".) As a separate entity, it has its own rights, privileges, and liabilities apart from the individuals who form it.
The shareholders of a corporation are generally not personally liable or responsible for the debts or obligations of the corporation. A stockholder's personal liability is usually limited to the amount of his, her or its investment in the corporation and no more. A corporation continues to exist after the death of or transfer of shares by one or more of the shareholders. A corporation pays taxes on its profits, and its shareholders pay taxes on dividends, unless "S" tax status is elected - then the profits and losses of the corporation "pass through" to the shareholders.
Advantages of Incorporation
* With the shield against personal liability, the shareholders of a corporation have only the money that they have invested into the company at risk - shareholders are generally not required to pay their own money to satisfy any debt of or judgment against the company.
* Many view the corporate structure as being permanent, adding "instant" credibility and stature to a business.
* A corporation can be the most enduring legal business structure. If a sole proprietor or partner dies, the business ends or it may become involved in various legal entanglements. A corporation's existence may continue on regardless of what may happen to its individual officers, directors or shareholders. Also, ownership of the business may be transferred, without disrupting operations, through the sale of stock.
* Capital can be more easily raised with a corporation. This may be accomplished through the sale of stock or other equity interests.
* Corporations can offer anonymity to its owners. The corporate name is used in the operation of the business, generally not that of the shareholders
* Tax Advantages - Deductible Employee Benefits. Corporations may offer the advantage of providing tax-deductible benefits such as the cost of health and life insurance, travel and entertainment as well as providing an increased tax shelter for retirement plans.
A sole proprietorship is generally owned by a single individual or by several family members. A sole proprietor maintains and retains complete control of and responsibility for the business, receives all profits, is responsible for all loss, as well as all taxes and liabilities of the business. There is no liability protection offered to a sole proprietor and the persons engaged in this type of business are at risk of losing personal assets, even if the same are not part of the business. The primary advantage to this business is that there is little "official" paperwork required to begin or to run this type of business. Plus, decisions can be made quickly by the business owners in a sole proprietorship.
A partnership operates by an agreement (either orally or in writing) by and between two or more people acting as co-owners of a for-profit business. The partners share personal liability for all claims against the partnership and share all profits and losses. Profits and losses can be allocated to the partners as they see fit. Profits are generally taxed as personal income for each individual partner.
In a limited partnership there must be at least one general partner who manages the business and who is fully and personally responsible for all claims against the partnership business. In addition, there are investors (i.e. the limited partners - known in the past as "silent" partners) who do not engage in the management of the business and whose liability for the business is limited to the extent of their investment into the business. Like a partnership, the liabilities and distribution of profits are based upon the agreement reached by all of the partners. Limited Liability Partnership
A limited liability partnership has the same characteristics of a general partnership provided, however, none of the partners can be held personally liable for claims against the business. Under this form of business, each of the partners is generally not liable for the errors or negligence of the other partners unless they themselves are supervising, directing, or involved in the action for which a claim has been filed. As with a general partnership, profits are taxed as personal income for each individual partner. To obtain the benefit of the limit on the liability, this type of partnership must file articles or other appropriate documents with the state - in other words, it requires a formal filing to start this type of business.
A careful choice must be made when selecting the proper structure for your business, as the setup chosen has long-lasting effects on tax situations, liability, adding new investors, growing or closing the business, and more. If you are unsure about which structure is best for your business, we suggest you either do further research or consult an attorney.
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DISCLAIMER REGARDING LEGAL ADVICE: None of information contained on this web site is intended to constitute legal or other professional advice, and you should not rely solely on the information contained on the site for making legal decisions. When necessary, you should consult with an attorney for specific advice tailored to your situation.