One of the most common questions that business owners or would-be business owners should have in mind is, how do I want to set up my business?
There is a right answer, and it will depend on what you want or don’t want.
This article is not a substitute for consulting an attorney in your state to assist you with the process. It is meant as an encouragement for doing and should help as a starting point for pointing you in the direction of the right questions to ask.
Most people have seen a suffix at the end of a business’s logo such as LLC or Inc., and it is possible they even know what those stand for, limited liability company, and incorporated, signifying which business entity type that business filed under.
When forming your new business, you have options. If you do nothing officially, you will either be operating as a single proprietorship (if you’re “flying solo”) or a general partnership (if you have at least one other person sharing responsibility). These are the only types of business entities you can “oopsie” into without filing with the state.
The other two common entities are the ones first mentioned, a limited liability company, and a corporation.
Formation of both requires official documents and it is strongly recommended you seek an attorney to draft yours.
Corporations are most of the business entities that you see on the Fortune 500 list and/or the NASDAQ, however, unless you are hooked on the idea of becoming a publicly-traded company, LLC is general (NOT ALWAYS) best answer for your business.
Limited liability companies are what some have been called “the King of the Hill” of business entities for a reason (Rodney D. Chrisman, LLCs Are the New King of the Hill: An Empirical Study of the Number of New LLCs, Corporations and LPs Formed in the United States Between 2004-2007 and How LLCs Were Taxed for Tax Years 2002-2006). They combine aspects of the other choices without some of their drawbacks.
Limited liability companies are named so because generally, personal assets are shielded from debts and suits, meaning that if your business has a rough year and you end up deep in the red, there is a good chance any bank accounts or property in your name is just fine as long as they were separate from transactions involving your business. Navigating through that allocation of assets sounds tricky because it can be, which is why an attorney is strongly recommended. A partnership does not have this same benefit, and a partner in the partnership has the potential to put his or her assets at risk should the worst happen.
The other benefit of an LLC is favorable taxation. While taxation may seem dull and boring (it can be, promise) but it matters when you (or your business is the one having to worry about your tax breaks. Partnerships have great tax benefits. The federal tax laws allow partnerships to have what lawyers and CPAs call “pass-through” taxation, where the business is responsible to pay minimal if any taxes, only the “partners” have to pay tax on any income they receive. However, the partnership tax benefit includes the liability dangers mentioned earlier.
The appeal of shielding personal assets from liability used to draw many to set up a corporation, but the drawback is that corporations often have to deal with double taxation (the corporation is taxed, and the shareholders are taxed separately).
So, there’s the big money question, which is the lesser evil, harsh taxing, or leaving personal assets open to potential liability? When filing as an LLC, you can choose to have your business taxed like a partnership if you desire and keep the whole “limited liability” idea.
This is not a blanket recommendation that an LLC is the only option and is going to be the only way to succeed (plenty of companies that gross billions of revenue are corporations still), it is instead a simple breakdown of the advantages of a relatively newer business entity choice for your new business or restructuring your old business.
As mentioned earlier, seeking an attorney for all of this complex process is the best path even after your armed with new knowledge.
Eden Law PLLC can and will be that guide, all you need to do is reach out!
Written by Christian R. Dudley