Entity Selection and Formation for Corporate and Small Business

When creating a new business, it is important to choose the correct legal structure. Choosing the type of entity will impact such things as the type and manner of governmental formalities the business will need to comply with, how much personal liability the shareholders, members or partners will have within the business, as well as potentially impacting the ability to raise funds.

For most new business owners, such terms as a corporation or sole proprietorship can be confusing. What type of entity should you create? A corporate lawyer will be able to provide you with insight as to the common forms of businesses and which entity will work for you. Sole proprietorship, S corporation, corporation, and partnership are common entity types along with limited liability partnerships (LLP’s) and a limited liability companies (LLC’s).

Each entity type has different requirements both for creation and long-term planning. Thus, it is important to choose wisely and develop a structure that will match the needs of your business. Learning more about each entity type is beneficial as it helps you to better understand your options and find the right classification for your business goals.

Sole Proprietorship

When it comes to entity types, a sole proprietorship is the simplest structure for a business. This entity type involves one individual who is the owner as well as the operator of the business. If you are going to be working without any other “partners,” then this may be the business type for you.

Disadvantages of this option include that you are personally responsible for the liabilities of the company. This means that you are placing personal assets at risk, assets that could be seized to satisfy business debts or if a legal claim is filed against you. It is also may be difficult to raise money or secure lender financing with a sole proprietorship..

Partnership

If your business will involve several people as the owner and operator, then a partnership may be a good choice. There are two types of partnerships available; a limited partnership and a general partnership. With a limited partnership, there can be both general as well as limited partners. With a general partnership, partners are the managers of the company and will take on the responsibility for the debts of the partnership as well as any other obligations.

Limited partners are investors only and do not have control over the company. Such partners are not responsible to the liabilities as general partners are. In general, a limited partnership is not favored except for certain situations because it requires complex filings and has numerous administrative issues. A general partnership is easier to form if the company will involve partners who are active in the company.

With a general partnership, the business structures set up each partner with a liability involving obligations and debts of the business. Each partner will be able to act on behalf of the business, securing loans and making decisions in furtherance of the partnership, but that will affect all of the other partners.

Corporation

Another structure option for entity selection is a corporation. With this business structure, you have a more complex and expensive option when compared to other structures. A corporation is considered an independent legal entity and separate from the owners. Because of this, the business will have to comply with more regulations as well as have more requirements for taxes.

The best benefit of this entity selection is that the business owner receives liability protection. The debt of the corporation is not considered as belonging to the owners so personal assets are not put at risk. A corporation can retain some profits with the owner not having to pay taxes on them. A corporation can also raise money easily by selling stock. This option is one that makes filing a business as a corporation more appealing.

S Corporation

For small businesses, the S Corporation filing can be more attractive than a standard C Corporation. An S Corp has tax benefits as well as provides the owner with liability protection. An S Corp can have as many as 100 shareholders, so the small business can still have a good number of investors, which will attract more capital for the business. On the downside, an S Corporation must follow many of the rules that corporations need to follow which will mean more legal and tax service cost.

Limited Liability

Since the late 1970s, the option for a Limited Liability Company has existed. Also known as an LLC, this entity type includes features from corporations and partnerships. This option allows business owners to have liability protection. There is no limitation on the number of members of the LLC. Generally, there are minimal (and in some states), no additional state-mandated annual administrative functions required with LLC’s, such as the requirement to file an annual report with the Secretary of State. Additionally, LLC’s offer the most flexibility between the Members as the business is generally operated under an Operating Agreement, which is an agreement between the Members as to how the affairs of the business will be carried out.

Relying on Dependable Counsel for Entity Formation

When it comes to business formation and entity selection, businesses need dependable counsel. With a corporate lawyer by your side, businesses have a knowledgeable individual who can provide insight into the various business structures to help choose the right entity for tax and business needs.

With the right team by your side, you can place the proper attention on business considerations to help protect the value of the business, helping to attract prospective lenders or buyers. Contact the DeBaltzo Law Firm today to schedule a discussion regarding your business entity selection.

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