Many begin the new year with optimism and hope, and this is reflected in the creation of new businesses. More new businesses are created just after the new year than at any other time of the year. Before you launch your new business venture, there are a number of things you should know and do. But most importantly you should discuss your options with an attorney. Contact an attorney at HCWD, PLLC who can help you.
The type of organization a business owner choosesis among the most important choicesmade regarding the company. The organizational structure your business adopts will affect a multitude of factors, many of which will impact your company’s future. Aligning your goals – both personal and professional – to your business organization will impact:
- How the business and the owners are taxed;
- The ability to limit liability;
- The ease or complexity with which the organization is managed;
- How the owners interact with one another.
There are four main types of business organization: Sole Proprietorship, Partnership, Corporation, and Limited Liability Company, or LLC. Each type has its advantages and disadvantages. Contact Us to help you choose the best entity for you and your business needs.
The simplest form of business ownership. A sole proprietorship is a business owned and run by someone for their own benefit. There is no other entity (as there is in the other business forms) so it simplifies its operation and makes sustainability across generations more difficult.
Advantages of sole proprietorship:
- All profit in the business goes to the single owner;
- There is little to no governance requirements;
- Owners have total control when running the business;
- Very few requirements for starting—often only a business license (if any, this depends on the industry)
- Owner is liable for business debts and legal liabilities;
- Ownership of proprietorship is difficult to transfer;
- Makes it less attractive to a prospective buyer;
- Makes it more difficult to pass to future generations.
- Difficult to tax plan for owners to minimize tax exposure.
A sole proprietorship is almost never the most effective form of business. If you are operating such a business, please contact the attorneys at HCWD, PLLC to see how you can convert into a format that gives you the flexibility of operation while offering you greater protection.
Partnerships come in two main types: general and limited.
- In general partnerships, each owner (there must be at least two) invests their money, property, labor, etc. to the business and are both jointly liable for all business debts. Thus, even if you invest a little into a general partnership, you are still potentially responsible for all its debt. General partnerships do not require a formal agreement and can be verbal or inferred between the two business owners based on conduct. In the event of a general partnership with two partners, the partnership is dissolved upon the death of one partner (absent succession planning documents).
- Limited partnerships require a formal agreement between the partners. They must also file a certificate of partnership with the state. Limited partnerships allow partners to limit their own liability for business debts according to their portion of ownership or investment by also limiting an individual partner’s control of the business.
Advantages of partnerships:
- Is a legal entity separate from the individual owner;
- Provides the ability to attract potential capital and talent;
- Can be a simple structure to create and maintain;
- Inexpensive to establish a business partnership, formal or informal;
- Allows for passthrough taxation.
- Each partner is 100% responsible for debts and losses (in a general partnership);
- Needs at least two individuals/entities to create;
- Partnership ends when any partner decides to end it or upon the death of a partner (absent good planning documents).
With proper planning, a limit partnership (or limited liability partnership) can be a worthwhile entity structure. A general partnership is almost never the optimum choice. If you would like to discuss whether a partnership is right for you, and how best to structure it, please contact the attorneys at HCWD, PLLC to see how to establish a partnership to protect your business interests.
Corporations are among the oldest forms of business associations. This structure allows a business to attract new capital more easily, and allows owners – shareholders – to hire managers that need not be owners to run the business.
To address some of the advantages of partnerships and limited liability companies, the government has allowed a tax election – the “S” election – to allow corporations to have passthrough taxation similar to partnership. The “S-Corp” has thus become a popular entity and a viable alternative for closely-held businesses and addressing one of the major disadvantages of corporations.
Advantages of a corporation:
- Limits liability of the owner to the amount invested in the corporation;
- Profits and losses belong to the corporation, and dividends are generally made on pro rata basis;
- Ownership can generally be transferred more easily;
- Personal assets are not exposed to corporate liability.
- Establishing a corporation can be more complex;
- Compliance with state corporate regulations can take more effort;
- Income is taxed twice (C-Corp);
- If an S-Corp is formed (a tax election separate from the formation documents), only individuals (as opposed to other entities) can be owners, limiting its usefulness in some circumstances.
A corporation is a valuable entity form and could be appropriate to your business needs. Contact an attorney at HCWD, PLLC to discuss the advantages and disadvantages and how it applies to your situation.
Limited Liability Company (LLC)
A limited liability company, or LLC, is the newest of the busines forms. Similar to a limited partnership, an LLC provides owners with limited liability while providing some of the income advantages of a partnership. Essentially, the advantages of partnerships and corporations are combined in an LLC, mitigating some of the disadvantages of each.
Advantages of an LLC:
- Limits liability to the company owners for debts or losses to the amount invested in the business;
- The profits of the LLC passthrough to the owners without double-taxation (each owner is taxed on his or her share of the profit at the personal level);
- Other entities can be owners of an LLC.
- Require comprehensive legal advice to be set up for the maximum benefit;
- Some have a perception that an LLC is a lesser business than a corporation.
These basic structures all can be modified and customized to fit your personal and business needs. Contact an attorney at HCWD, PLLC to discuss the advantages and disadvantages and how it applies to your situation.