Selecting the right business entity for your start-up is one of the most important decisions you will make during the life of your business. There is no one-size-fits-all entity for every type of business, and choosing the right business entity depends on a number of variables. When the attorneys at Shoffner & Associates help you select your business entity, we make sure that your choice will help ensure your success.
To choose the right entity, we consider the following:
- What your business will do;
- Who are the decision-makers;
- How many key players are involved;
- Who are the investors;
- How will you raise money;
- What is your exposure for liability;
- How will profits be shared;
- What kind of employee benefits will you provide; and,
- What is your exit strategy.
After taking those factors into account, your entity will fall into one of four categories:
- Sole Proprietorship
- Limited Liability Company
Sole Proprietorship. If you don’t form an entity formally, by default your business will be operated as a sole proprietorship. This is a business that is owned by only one person and it is not a separate legal entity. That means that there is no distinction between the business and its owner, and that the owner is responsible for all of the business’ liabilities. All of the business profits and losses are reported on the owner’s tax return, and the owner is subject to self-employment tax.
Partnership. A general partnership always has at least two owners and it comes into being as soon as two or more people join together in the ownership and operation of a business. Like the sole proprietorship, no registration is required, and there is no protection for the owners from business debts or liabilities. Profits and losses are shared equally between the owners unless you have a written agreement that provides for sharing profits and losses differently. Partners are also liable for each other’s acts including the debts incurred by the other partners and for another partner’s wrongdoing. A partnership is considered a pass-through entity for tax purposes.
Corporation. You must file Articles of Incorporation with your business’ home state in order to be a corporation. Corporations are completely separate entities that are operated by their officers and board of directors, and that are owned by the shareholders. Unlike sole proprietorships and partnerships, corporate shareholders are not responsible for the corporation’s debts or liabilities. Depending upon the size of your corporation, your goals, and your exit strategy, you may choose to be either a C Corporation or an S Corporation. The key difference is that the C Corporation pays a tax on its profits, while the S Corporation is considered to be a pass-through entity so that a pro-rata share of the profit is reported to each shareholder. That profit is reported on the shareholder’s annual tax return and is taxed at the individual’s tax rate.
Limited Liability Company. A limited liability company is also formed by a filing with the business’ home state. A limited liability company is operated by its managers, and it is owned by its members. Like an S Corporation and a partnership, it is a pass-through entity, and the members can choose whether to be treated as a partnership or as a corporation for tax purposes. The limited liability company provides its members with unique protection from creditors that is available to partnerships, and the members also can choose how the profits are allocated between them as opposed to having the profits allocated on a strictly pro-rata basis.
When choosing which entity to form, the attorneys at Shoffner & Associates will take into account all of the factors that are unique to your business and they will ensure that you choose the right entity and that you set it up the right way.