Business Entities for Multiple Owners
A limited liability company will most likely be the business entity of choice if there will be multiple owners joining together to operate a business or own property. Washington Secretary of State staff informally estimated about 80% of the new entity filings are for LLC’s.
A primary concern of multiple owners is liability protection. One owner does not want to be personally responsible or liable for the mistakes of another owner. Also, the owner does not want his or her personal assets available to creditors of the business. Traditionally, only the corporation offered such protection. But today, with the enactment of the limited liability company statutes, an LLC gives the same degree of protection as a corporation.
Multiple owners will also benefit from the greater flexibility of an LLC over a corporation. LLC owners can custom tailor their economic arrangements, sharing of profits and losses, the amounts and timing of distributions of cash or property, and the compensation paid to owners who render services to the company. Owners may give priority returns to the owners who invested differing amounts of capital, or who perform differing amounts of services. It is much more difficult, and sometimes impossible, to accomplish this in a corporate entity because of the federal tax code limitations.
For federal income tax purposes, the LLC entity is a “pass though” entity. The income (or loss) of the LLC is passed through to the owners. The LLC pays no tax. The double tax of the C corporation is avoided. The S corporation is also a “pass though” entity, but the S corporation is hobbled with restrictions on the number and nature of owners, and on the way income, cash, and property are distributed out of the corporation. An LLC, for various reasons, may elect to be taxed as an S corporation.
An LLC is not the only entity to think about when multiple owners are involved. For example, if a business expects to have no losses and expects to go public rather quickly, a C corporation may be the way to start. A small percentage of new businesses fit into this category. There are other situations where a different entity is appropriate for multiple owners. The new business should be thoroughly discussed among the owners, attorney, and CPA to decide on the most appropriate business entity for the particular circumstances.
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.