Which Corporate Entity is right for starting my Business?

This is a common question asked by my clients when first creating their businesses.  In this complicated area of the law, you may receive conflicting advice.  This article will hopefully break down in simple terms some important considerations you should make in selecting your business entity.

Generally, when selecting your entity, you should consider the flexibility of ownership you are seeking, limited liability protection of your assets, and the all important tax considerations when you run your business.  The main options you have are typically between a Sole Proprietorship, a Corporation, or a Limited Liability Company (“LLC”).

Sole ProprietorshipThis is the simplest option in terms of filing requirements, registration, and the upkeep of business formalities.  You simply need to pick a name for your Company, pay a fee, and start your business.  One disadvantage however, is that you do not have limited liability protection, meaning since you and the company are considered the same, this business form does not protect your personal property.  Therefore, if your business is sued or you incur debts, you will be held personally liable.  If this is a concern for you, a Corporation or LLC is often the better choice.

Corporation: If you are seeking to separate your personal assets from your business finances, you may want to create a corporate entity.  Therefore, a lawsuit or debt incurred against your business will only affect the business assets itself and protect you from personal liability.  It is important to include the name of the corporate entity on any legal documents signed in the course of business dealings to protect you from personal liability.  This type of entity does require you to adhere to strict corporate formalities such as appointing a board, holding meetings, creating a bylaws and recording minutes.  You will also be required to fund the corporate entity and issue stock.  A major disadvantage in this type of entity is the double taxation of your Company.  The corporation is considered a separate entity that the government will tax and a second time will tax you as the business owner on your personal tax return.  In order to ease the impact of taxes to small business owners, the government created “pass through entity”.  These can be either a Limited Liability Company (LLC) or S tax status corporation.

Limited Liability Company: Two major advantages of an LLC is that first, there are less strict corporate formalities to adhere to and second, the LLC can avoid the problem of double taxation.   The LLC should however create a flexible operating agreement to serve as a guide on how the LLC will operate.  Our Business Law Attorney can assist you in drafting such an agreement at a reasonable flat-fee rate.  The LLC as a “pass through entity” allows the earnings to be taxed as if personally earned by you.  One disadvantage is that the LLC may still be subject to self-employment taxes on all income earned.  However, the LLC can elect to be “S status” to eliminate this requirement on some of the employment taxes.

S-Status: An LLC and a Corporation may elect S status in order to avoid self-employment taxes on some of their earnings.  If you pay yourself a salary through your company, you would only pay the self-employment tax on that amount rather than the full gross income of the company itself.  However, income tax would still apply on the total company’s income.

Do you Need a Lawyer to help you Set up your Business?Yes, it is important to take into consideration which choice of business best fits your needs and future goals of your Company.  Our Business Law Attorney can guide you on how to set up your business and ensure you are adhering to all required corporate formalities.  If you have any questions related to your new business, please contact our firm at 503-951-8209.