Choice of Business Entity
Posted on 02. Dec, 2009 by briankoeberle in Business
In this economic downturn, many people who have been downsized have been bit by the entreprenurial bug and are contemplating starting a business. What legal structure the business will have is an important first step in launching the new venture. By default, a new company is a sole proprietorship or partnership unless a different busines entity is created. However, a sole proprietorship and/or partnership is not distinct from its owner(s). Any income (or loss) is reported directly on the owner’s tax return, and you remain personally liable for any of your business’s debts or liabilities. Even in the case of a partnership, you can remain personally liable for any deals, debts or liabilities your partner makes. Limiting personal liability is the main reason I recomend to my clients that they consider either the corporate form of business ownership, or forming a limited liability company (LLC). Both forms offer limited liability protection, meaning that your liability is limited to the assets of your company only, unless you personally guarantee any loans, debts or obligations. However, the tax implications vary, so it is important to discuss the pros and cons of the LLC structure versus the traditional Subchapter C Corporation or Subchapter S Corporation with both your attorney and accountant. For small companies I have been recommending the LLC form of legal structure. The LLC is a flexible form of ownership that offers the limited liability protection of a traditional corporation with the pass-thru tax structure of a sole proprietorship or partnership. In additon, the LLC may be a better option in the event you want to sell or disolve the company. Since the assetts of the LLC belong to its members (owners), a sale of the business can be structured as a sale of assets instead of stock, or distributed directly to its members in the event of a dissolution. The important point is to start out on the right track with your choice of business entity so that you can concentrate on growing and nuturing your new business venture.
