Which Form of Business Should I Be?
Author: Nina Kaufman
Author: Nina Kaufman
Copyright (c) 2010 Ask The Business LawyerHow do business owners separate their personal assets from those of the company's? They may not have much personally, but the prospect of being named in a lawsuit when things go wrong with the business is not a comforting thought. How is the business owner going to concentrate on running the business with this worry hanging overhead?One of the simplest ways to protect yourself is to form a separate business entity. That way, the entity (not you, personally) takes the "hit" from any lawsuit that might occur in the course of your business. That's also why they are called "limited liability entities," because they limit your personal liability. Limited liability entities come in many forms including the C-corporation, S-corporation, limited liability company, limited partnership, professional corporation (or, in some states, professional association), limited liability partnership, and professional limited liability company. Like the dessert tray at a buffet, all will meet a particular need, but are slightly different in their form and composition, and some aren't right for everyone.Many small business owners prefer the tax advantages of the S-Corp (named after Subchapter S of the Internal Revenue Code) or the limited liability company. How do you know which works best for you? Here are some important factors to consider.1. Who are the business owners? How many of them are there? Are they foreign investors who live overseas, even if they are family or relatives? Are you running the business alone? Are you practicing a profession? Your answers to these questions will shape the business structure that is optimal for you. For example, an S-Corp cannot have more than 100 shareholders, all of whom must be US residents and citizens. A LLC has more flexibility, other than needing a minimum of two owners in some states. Further, some states require that the owners of professional corporations be licensed practitioners of that particular profession, e.g. only licensed contractors can own a contracting company.2. Does your small business need flexibility in establishing profit sharing and management responsibilities? An investor could be the "idea person" with the new technology and the other, the financial means to fund the company. In such a case, the division of profits is not directly linked to management control as the idea person is best suited to run the company. So what works? Would the two of you want a half split in profits? How much management control does the financial investor require? The two of you need to work this out right at the beginning and a limited liability company gives you the most room to adjust profit and management sharing. For example, the financial investor may opt for 55% of the profits and barely any stake in management because he or she has full faith in the bright idea. An S-Corp. would not be suitable for such a situation because all shareholders have to belong to one class, and profits are distributed according to the percentage of ownership.3. Most small business owners prefer the S-Corp and the limited liability company for the pass-through treatment of profits to personal income. The business entity is not taxed, unlike the C-Corp whose main drawback is double taxation. Note that in some states, the S-Corp is subject to state and local taxes even though it has no federal tax liability. The LLC is taxed like a partnership and all profits flow completely through to personal income. Before finalizing your decision, ask your accountant to compare tax treatments for different business structures. You may see marked differences from one to another.4. What is the cost of starting and a maintaining a business structure? That varies from state to state. Further, there are certain business formalities and filings to observe in the case of an S-Corp such as regular shareholder meetings and minutes kept, filing of reports, and filing of corporate returns. The tax returns require the services of an accountant, which can increase the costs of running your corporation over an LLC. Further, filing requirements also differ at the state level, and generally speaking, an LLC is relatively free from regulatory considerations and is generally cheaper to run and maintain.The choice of business structure is a significant one that can be difficult (and costly) to change. So be sure you're making the right decision for you and your business by consulting with an attorney and an accountant before taking this important step.
About the Author:
Fed up with convoluted legal issues in your small business? Check out Nina Kaufman, Esq's resources at
http://www.GreatBusinessLawResources.com . An award-winning business attorney and online columnist/blogger for Entrepreneur Magazine, she demystifies legal mumbo-jumbo to save time, money and aggravation. Get her free Entrepreneurs Business Law Primer at
http://bit.ly/freebizlaw
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