ENTITY CHOICE MATTERS
Choosing an organizational structure for your business is an important decision. It affects company governance, taxation, and potential liability. Our business attorneys can help you understand your options and the relative regulatory and legal advantages of each.
FAST FACTS ABOUT BUSINESS FORMATION
While forming a new business involves far more than just entity choice, this still should be the starting point for anyone starting a new business. The entity structure affects ownership rights, management responsibilities, personal liability, and taxation.
Incorporation is favored by businesses who want to raise capital by outside investment, namely through the sale of stock. Corporations insulate shareholders from most type of personal liability and stock is easily transferrable to allow investors to trade ownership stakes. Though there are disadvantages to incorporation. Generally, corporations are subject to corporate income tax. Then any dividends distributed to shareholders are subject to additional personal taxation. Small businesses can incorporate as an S Corp to avoid this “double taxation.” Corporations are also subject to more regulatory formality than LLCs or partnerships, including mandatory annual reports. However, the greatest disadvantage to incorporation may be that common stock is treated as an asset against which creditors can collect. This means that even if you incur personal debt or liability, the common stock you own could be seized and sold.
Limited liability company, or LLC, is a newer organizational structure intended to provide the personal liability protection of a corporation without its rigid formalities. LLCs are typically more flexible and in some ways offer superior protection against liability, though it still is possible to pierce the LLC’s “corporate veil” in certain situations. An LLC consists of “members” whose ownership or other interests are not defined by stock certificates, but by an operating agreement. This can offer more flexibility than creating different classes of stock in a corporation. LLCs have no annual meeting or reporting requirements and membership is not a collectable asset. LLCs also offer flexible tax election.
Unlike LLCs, which can be formed with a single member, partnerships require at least two members. Partnerships can be “general” or “limited” and may also elect to organize as a limited liability partnership. General partnerships are the most informal and do not require any formal organization. In a general partnership, the partners enjoy equal authority to make decisions that bind the partnerships, so one partner can incur debt that binds the other partners. General partnerships offer no formal personal liability protection either. General partners are liable for any liability incurred in the ordinary course of business. Limited liability partnerships offer personal liability protection similar to an LLC.