One of the passions that I have in addition to the law is helping new entrepreneurs with starting and succeeding in business. There is nothing greater, in my opinion, then being your own boss. However, in today’s legal landscape, choosing the correct legal entity can make all the difference in the world from a liability perspective or a tax perspective. Listed below are some of the various legal entities when it comes to organizing your business.
A sole proprietorship is the least favored form of business planning. It is essentially no business planning at all. For instance, if Joe decides one day to start a business and starts operating the same day, he has a sole proprietorship. There is no liability protection with a sole proprietorship. You are personally liable for the debts of the business and can be sued personally for acts and omissions regarding the business. From a tax perspective, it is considered your income and you are taxed individually.
Limited Liability Company
A limited liability company (LLC) is a separate legal entity, and one of the most popular legal entities for small businesses. The requirements of a valid LLC are filing of articles of incorporation with the state and paying the applicable fee. An LLC with only one member is disregarded as an LLC by the IRS for tax purposes. This means that all income flows through directly to the individual member. However, a sole member LLC can elect to be treated as a corporation for tax purposes by filing the required S-Corp tax treatment by the required deadline. When an LLC consists of more than one member, it is presumed to be a partnership for tax purposes and will be taxed as a partnership unless the LLC elects to be treated as a corporation for tax purposes. Again, to elect corporate tax treatment you must file the S-Corp election by the deadline. The main benefit of the LLC is that only the assets of the LLC are subject to loss and insulates the individual members of the LLC from personal liability.
A partnership is defined as an association of two or more persons to carry on as co-owners of a business for profit. A partnership consists of two parties: a general partner and a limited partner. The general partner is considered to be liable for the debts of the partnerships. However, the limited partner is only liable to the extent of the limited partner’s investment in the partnership. From a tax perspective, limited partnerships are disregarded entities for tax purposes and all income and loss flows through to the individual partners.
A corporation is a separate legal entity just like an LLC. However, instead of members, the owners have shares in the corporation. In addition, a corporation will also consist of a Board of Directors responsible for management and business affairs of the corporation. From a liability perspective, the owners of the corporation, as well as the members of the board of directors, are insulated from personal liability for their acts on behalf of the corporation. However, owners and members of the board of directors can be held personally liable under limited circumstances in the event of intentional acts, corporate fraud, not acting in a business capacity, or failure to follow corporate formalities, to name a few. In addition, from a tax perspective, a corporation is subject to double taxation. This means that the profits are taxed at the corporate level, and the distributions to the shareholders are taxed as well.
For More Information
Which type of legal entity is right for your business? That is a difficult question to answer, as it may be different for every different type of business. The best thing you can do is seek out competent and experienced legal counsel to assist you with the start-up stage and on an ongoing basis to ensure that you are protected. The worst thing a business owner can do is handle their legal matters themselves, and then before they know it, they are in court with their personal assets at risk.
If you are interested in speaking with one of our experience corporate and business attorneys regarding the proper structure or restructure of your business, please contact our office at (513) 241-0400 or use the contact form on our website to schedule a time to meet with one of our Business and Corporate Attorneys! We look forward to seeing you in the office soon!