Legal Issues That Business Owners Frequently Deal With: Choice Of Business Entity
Every business owner must make a decision as to the business entity that he or she wants to do business in. Every business venture is unique and every owner has different goals and concerns. From my experience, no business structure is always perfect for a certain type of business. Rather, there are a number of factors that most people will want to consider when selecting the appropriate structure for their entity. Let’s consider one example:
- S corporations, partnerships and LLCs all provide flow-through for owners, which is desirable, particularly when the owners are not employees and therefore do not draw a salary, and when the owners do not necessarily wish to invest significant profits in the company.
- C corporation are different in that moneys paid out in the form of a salary either to owners or non-owners become a tax-deductible business expense to the company, and the employee taxed on his or her earnings.
If the business expects to lose money initially, a flow through entity like a partnership, LLC, or S corporation is preferable because it will allow owners to deduct the losses from their taxable income. Many other factors may come into play when choosing the best entity for a particular business:
- Management: Another important issue to consider is the level of participation investors want to have in the management of the enterprise. Different forms of a business entity can restrict the level of involvement if owners want to maintain limited liability status. For instance, with a limited liability company, members can choose who will manage the entity. Some, all, or none of the members may choose to engage in management. Other types of business entities impose more restrictions. Management structure has an obvious impact on choice of business entity.
- Personal Liability: In setting up a business entity, one of the issues to consider should be related to limiting personal liability for the debts of the entity. For example, a corporation, LLC or a limited Partnership can provide limited liability; whereas, a sole proprietorship or general partnership will not.
- Termination: How easy will it be to wind up the business and return capital and profits to the owners? A sole proprietorship, for example, can simply and quickly be sold and consent from others is not required.
- Cost: What is the cost of setting up the business? A rule of thumb: the simpler the structure, the smaller the cost.
- Ease of Operation: How easy will it be to run the business? Are there many formalities associated with the business structure? The answers to these questions depend upon the facts related to a business owner’s specific situation and the type of operating formalities relating to the S corporations, partnerships, and LLCs.
These and many other questions should be at discussed with an introductory legal consultation when determining the type of business entity that is appropriate for you. In fact, the above is only a partial list of items that should be included as part of an introductory meeting. If you are interested in discussing any of the items above or anything else, please feel free to contact me.
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