Starting a business is incredibly exciting, but few people understand how the type of entity they form can affect them later on. Deciding what entity to form can have beneficial or catastrophic consequences for not only your business, but for your own personal finances. While there are many types of business entities, the business lawyers at Feldman & Feldman see the following most often:
Limited Liability Company (LLC)
Limited Liability Companies or LLCs do just that – limit liability. When you form an LLC, your business assets and debts are separate from your personal finances and assets. This means the assets of the business are exempt from the owners’ creditors. LLCs allow creative allocation of the profits and losses incurred by the business among the owners. LLCs also have flow-through income taxation, meaning the income generated by the business is filed as part of the owner’s personal income, preventing the profits from being taxed separately.
Sole Proprietorships are relatively easy to form and operate and do not require state filings; however, the owner remains personally liable for any lawsuits or debts against the company. Many people opt for sole proprietorships when they are starting their businesses because they are less expensive to form, but this could leave business owners vulnerable to more costly situations in the long run. People considering a sole proprietorship need to really consider whether the risks make this entity choice worthwhile.
Similar to LLCs, C Corporations can limit the individual liability of directors, officers, shareholders, and employees. Owners also have the ability to sell stock, which can help attract investors. One big downside of a C Corp is the possibility of double taxation, where business profits are subject to taxes and the dividends paid to the shareholders are subject to taxes. C Corporations are subject to lots of regulations and complicated tax filings, so many will require the help of a skilled business accountant to file taxes.
S Corporations provide the same limits to liability and investment opportunities as C Corporations, but without the double taxation. Owners of S Corporations report their share of profits and losses on their personal tax returns and the income is only taxed once. Not every business qualifies to be an S Corporation, as only legal U.S. citizens or permanent residents can own them. Additionally, S Corporations also limit the number of shareholders to 100, which can limit growth potential.
Partnerships are a popular entity choice for small businesses because they are easy to form and operate; however, partners remain personally liable for company liabilities and business debts, even those incurred by another partner. Partners can help protect themselves by adopting a partnership agreement, but many business owners rush into formation before creating one.
Speak With A Business Lawyer
Before forming a business, it is crucial that you speak to an experienced business lawyer at Feldman & Feldman. The implications for each entity are incredibly complex, and only a lawyer will be able to evaluate your situation and advise you on the best type of entity to meet your needs. We can also assist with filing the necessary paperwork for formation, drafting partnership agreements, and advising on any business law matters. Schedule an appointment today to speak with one of our attorneys.