Choosing The Right Business Entity
Choosing a business structure is a key step when establishing a new business. The structure of a business can have implications for several essential elements of the way the business operates, including taxes and personal liability. A business structure is the legal framework of a company. It sets out key factors like ownership and profit distribution. The structure of a business should be established before it is registered with local, state or federal governments and should be chosen carefully. It can be costly and restrictive to make changes later. The business structure you choose can influence key elements of the business, including day to day operations, risk of personal liability, ability to raise capital funds, and taxes owed. Here is a breakdown of the most common business structures:
1. SOLE PROPRIETORSHIP
A SOLE PROPRIETORSHIP = is a business owned and operated by an individual. Sole proprietorships are the basic forms of business organizations, which require no formal type of government filings to form the business and are not required to follow any type of operating formalities.
The BENEFIT = of a sole proprietorship is the easy of doing business without government oversight.
The LIABILITY = of a sole proprietorship is that the business owner is personally liable for all liabilities and obligations of the business, which liability extends, not only to liabilities in excess of the amounts invested in the business including any insurance coverage, but also to the business owner’s personal assets.
2. LIMITED LIABILITY COMPANY
A LIMITED LIABILITY COMPANY = is an entity having one or more members, organized under State law. Limited liability companies have all the powers of natural people, which include the ability to transact business, sue or be sued, make contracts, own and transfer real estate, and issue stock subject to limitations.
COMPLIANCE REQUIREMENTS = for a limited liability company require more formality in formation and operation, such as, filing Articles with the State, filing a Statement of Information with the State, obtain an agent for service of process, and establish an operating agreement.
MANAGEMENT = in a limited liability company can be conducted by all its members or by one manager. Officers may be appointed to conduct the affairs of the business.
The LIABILITY = of a limited liability company is limited for all its members, managers and officers. As long as the State’s statutory requirements are followed, the members, managers and officers of the business are not personally held liable for any debt, liability or obligations of the business arising in contract, tort or otherwise solely by being a member, manager or officer of the business.
3. CORPORATION
A CORPORATION = commonly known as a C or regular corporation, is by far is the most common and well-known form of business entity. All corporations are governed by the State of incorporation and are treated as separate and distinct legal entities separate from its owners with all the rights to own property, make contracts and sue in its own name.
COMPLIANCE REQUIREMENTS = for a corporation require strict statutory compliance, such as, filing the Articles of Incorporation with the State, filing a Statement of Information with the State, obtaining an agent for service of process, establishing bylaws, issuance of stock, establishing a board of directors, appointment of officers, holding annual shareholder meetings, holding annual director meetings, and maintaining books and records of written minutes.
MANAGEMENT = in a corporation is generally conducted by the board of directors with the day to day operations of the business ran by the officers. The overall decision making lies with the shareholders of the business.
The LIABILITY = of a corporation is limited for all its shareholders and the shareholder’s personal liability is limited to the investment. As long as the State’s statutory requirements are followed, the shareholders, directors and officers of the business are not personally held liable for any debt, liability or obligations of the business arising in contact, tort or otherwise.
4. SUBCHAPTER S CORPORATION
A SUBCHAPTER S CORPORATION = commonly known as an S corporation, is a corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code and is treated as a partnership for most tax purposes. The income of the S corporation is passed through to its shareholders therefore avoiding double taxation. Other than the different tax treatment, the S corporation operates identically to that of a C or regular corporation.
If you have questions on how to protect your small business, schedule your consultation with the Queen of Business Law® Kelly Bagla, Esq. today and secure your peace of mind.
For more information on how to legally start, grow, and exit your business please visit my website at www.BaglaLaw.com.
Disclaimer: This information is made available by Bagla Law Firm, APC for educational purposes only as well as to give you general information and a general understanding of the law, and not to provide specific legal advice. This information should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
