What Form Of Business Entity Should You Choose For Your New Business?
By: Larry E. Bray, Esq.
The choices of business forms can confuse and intimidate entrepreneurs and new business owners. Each type of business entity has complex legal, managerial and taxation issues that can affect the entity and its owners for years to come. It is indeed an important decision. New businesses must consider initial start-up costs, personal liability issues, tax consequences and complexity. The most common forms of business entities that new businesses choose from are as follows;
Sole proprietorship – This form of doing business is the simplest because it combines ownership and management in one individual. The owner enjoys business profits and suffers the losses directly, with income taxed on the owner’s personal return and not on any business level. The risk in conducting business in this form is that the individual is personally responsible for business obligations. The reason this of business is the simplest is that there are no statutory establishment requirements. An owner can just start the business right up. The business should however file a “DBA” (doing business or fictitious name certificate) with Tallahassee, technically, in order to maintain the right to sue in the name of the business.
Partnership- This form requires two or more owners operation a business for profit. Similar to the sole proprietorship, the partners hold personal liability for business debt and other obligations. But, the owners also receive profits directly from the business as income. Because of this, partnerships can be very attractive to some entrepreneurs due to the positive tax implication. The Limited Liability Partnership (LLP) is a fairly new statutorily created entity which can allow for some limitation of liability provided that statutory requirements are met.
Corporations- These statutorily created entities have a life, separate and apart from those individuals creating them. Therefore, corporations assume liability for their own obligations, and insulate the owners, directors and officers of the business from personal liability. Further, corporations can sell ownership interests, or shares, in the company to raise money. However, notwithstanding these benefits, the tax treatment of corporation can be problematic. The corporation files its own tax return and pays taxes on its profits before it pays dividends to shareholders. Shareholders then must pay taxes on the dividends on their personal tax returns. This unwanted circumstance is infamously known as “double taxation”. Therefore, most small, closely held or family businesses would not elect to incorporate without the “Subchapter S” election. The tax rules allow a newly formed “C corporation” to elect to be an S Corporation which allows the corporation to be treated (for tax purposes only) as a partnership. Thus, an S corporation enjoys the limited liability of a corporation and the tax advantages of a partnership.
Limited Liability Companies- LLC’s and LLP’s are relatively newly created forms of business and have become popular recently. Like the corporation, these organizations combine some of the tax benefits of a partnership with aspects of the corporation, i.e. limited liability. And indeed, this mixture of benefits makes them similar in many ways to the subchapter S corporation which often makes the decision between them difficult. The limited liability company has specific ownership rules which are to governed by an Operating Agreement. There are no shares of stock to issue to shareholders who are owners. Rather, the owners are known as “members” and management of the business is given (by way of the operation agreement) only to “Managing Members” or to “Managers” who may not be Members (owners) at all.