Choosing a Business Entity

After deciding to start a new business, one of your first questions will be, “What kind of business entity should I be?”
You have many choices. Most people are familiar with at least some of the common business entities: corporations, partnerships, limited liability companies, and sole proprietorships. Some of these have subcategories. Corporations, for example, can be C corporations or S corporations. Partnerships can take the form of general partnerships, joint ventures, limited partnerships, or limited liability partnerships. Most of these business entities are governed by local state statutes, with federal income tax code and regulations affecting the formation and operation of the business entity.

In recent years the limited liability company (“LLC”) has become the most appropriate business entity in most situations. The LLC entity has a long history in European and other foreign countries.  But, only in the last few decades has the LLC been used to any great extent in the United States. Today, all fifty states recognize the LLC and have statutes governing the formation, operation, and termination of LLC entities. Advantages of an LLC over other business entities are substantial and numerous. A quick outline of the advantages includes:

  • The same liability protection against third parties as a corporation.
  • Can be taxed as partnership, with single level, flow-through taxation, as opposed to the double taxation of a corporation.
  • Flexibility of business deals and sharing of profits, losses, and capital, as opposed to strict proration under an S corporation.
  • Can elect to be taxed as an S corporation after consultation with your CPA.
  • Losses, which are common to a start-up business venture, can pass through the entity and be deducted directly by the owners of the business, as opposed to losses in a corporation which accumulate and are limited in how they may be used.
  • All members/owners of the LLC can be protected from liability, as opposed to a limited partnership where one partner has to be a general partner and is exposed to liability for all partnership actions.
  • LLC’s are easy to form and easy to dissolve compared to corporations, where appreciated assets can cause difficulties when a successful corporation is liquidated.

Choosing a business entity form has been simplified in recent years. An LLC is likely to be the entity of choice for a new business, except in limited circumstances where a C corporation would be appropriate. When creating the business entity you will want to speak with an experienced lawyer who can assist you in preparing the internal business documents, registering with the state, maximizing protection from liability, and minimizing tax issues.

This information is general in nature and should not be relied upon for your specific circumstances. For information, questions, or comments, please contact Douglas J. Engel or Kathryn S. Kumar.