Business Entity Selection
Most businesses start with a great idea or from a deeprooted passion. Sometimes, they are the result of both.
But there's much more to a successful business than a great idea and a passion. When starting a business, determining what legal structure you want – known as a Business Entity Selection – is vital to protecting the company's value, its ownership, its board (if applicable) and its employees.
There are multiple options available, each of which should be considered in the early stages as you move your business from a concept to reality. Those options include, but are not limited to: Sole Proprietorship; General Partnership; Limited Liability Company (LLC); Limited Partnership; and a Corporation. There are benefits to each as they can serve to protect you and your family's personal assets while offering potential tax advantages as a business owner.
With a Sole Proprietorship, there is only one individual who serves as the owner of the company. Under this structure, that individual bears unlimited personal responsibility for all of the company's liabilities. Though a sole proprietorship is common, McManus Estate Planning LLC typically recommends that clients consider other options first before choosing this one. Why? Because a sole proprietorship represents a risky proposition since the owner's assets are not protected and the owner is ultimately responsible for all taxes on revenue generated by the business.
When two or more people enter into business together, a General Partnership is one possible avenue to explore. Each partner agrees to participate in the operation of the business and each owns equal assets and shares in the company's profits or losses. Through an agreement, partners can opt to divide up the assets and profits/losses in a disparate manner; often this is based upon what each contributes, in terms of capital and labor, into the business. Like a sole proprietorship, McManus Estate Planning LLC also recommends clients consider other alternatives when it comes to a business entity. Why? Because legal protection is limited, leaving each partner's assets at risk. Additionally, a general partnership does not protect individuals from lawsuits that may arise due to one of the partner's missteps.
Of all the options available, one of the more popular structures is a Limited Liability Company, or LLC. If the company is owned by a single person, they can choose to file as a Single-Member LLC. With this scenario, owners are known as members and file articles, typically in either Delaware or the state where their business is located. Members risk losing only money they have invested in the LLC. Individually, each member must report his/her business profit or losses on their personal income tax returns. It is common for an LLC to have individuals who contribute capital to the business, but are not involved in its day-to-day management. This would require a Limited Partnership; the partner(s) would only be liable for the size of their capital investment.
Business owners can also opt to set up a Corporation which is a separate legal and taxable entity that is typically guided by a group of officers known as a board of directors. This structure opens up a business owner to the least amount of risk as his/her assets are generally protected from the liabilities of the corporation. When determining whether a corporation is the best model for your business, it is important to consider if outside investors will be allowed to vote (i.e. become board members) and how they will benefit (i.e. equity growth or income distributions) from returns on their investment.
There is a lot to consider when deciding which of these legal entities is right for your business. At McManus Estate Planning LLC, we will gladly work with you to see which structure is the best fit for your company's goals and objectives, both in the short- and long-term.
In addition to setting up a business entity for your company, we can also review your existing business documents and draft a succession plan when you retire or should you become ill, incapacitated or die. These are necessary considerations, particularly if your business and its future are important to you.