To operate your business, there are five major business entities used in this country: Proprietorships, General Partnerships, Limited Partnerships, Corporations, and Limited Liability Companies. Two separate and distinct questions need to be asked when considering the right entity for your business:
First, which entity offers the best asset protection? A Corporation is generally the optimal business form for superior lawsuit protection. Effectively run corporations provide a “shield” between the owners and the business. Corporations, however, require expenses such as filing fees, attorney fees, and accounting fees. They also generally require that corporate formalities be followed such as annual meetings, minutes, corporate resolutions, stock ledgers, and stock certificates. Most business owners will find the added lawsuit protection well worth the time and the expense. LLCs are quickly becoming an entity preferred by many small businesses because of the tax flexibility and the lack of corporate formalities required. LLCs also provide similar charging order protection as Limited Partnership in most states. Sole Proprietorships and General Partnerships may be easy and inexpensive to operate, bur provide little if any protection.
Second,how do I want the business to be taxed? Businesses can be taxed as a C-Corporation, an S-Corporation, a partnership, or a sole proprietorship. Business owners, who are making a good profit and are looking for maximum individual tax perks, will probably choose to be structured as a C-Corporation. Owners who may experience a loss in their business during the first few years may elect to be taxed as a partnership or a S-Corporation because the losses flow from the business directly to the individual owners of the business. Sole Proprietors and General Partnerships may be easy and inexpensive to calculate the tax burden, but offer fewer allowable deductions. It is recommended that a qualified professional be consulted to determine the best taxing method for your business.
To protect the assets used in a business, usually well-drafted Limited Partnerships and Limited Liability Companies that have specific clauses for asset protection are chosen. These entities offer the ultimate protection for the assets of the business plus charging order protection for the owner’s interest in the entity.
For more specific information or ideas to help you get started, give Legally Mine a call at 800-375-2453.