What factors should I consider in choosing an entity?
Some key things to consider when choosing an entity structure are management, tax implications and liability protection. If you want complete management control, you may look at operating as a sole proprietorship or as a single member limited liability company. If you want to minimize tax liability or want flexibility in choosing a tax structure, a limited liability company may be the best choice. If you are running a business that warrants liability protection, you want to choose an incorporated structure such as a corporation, limited partnership or limited liability company to protect your business from personal liability exposure.
What are the differences between a corporation, a limited liability company and a partnership?
Corporations are owned by the shareholders and managed by the board of directors. Corporations provide personal liability protection and also allow the organizers to elect for the corporation to be taxed as a c-corporation or as an s-corporation.
Partnerships are owned by two or more people and are governed by a partnership agreement. Like sole proprietorships, general partnerships are not required to register with the state, but must file an assumed named certificate with the county in which the partnership operates. The partners are also personally liable for all business debts, losses and obligations. Limited liability companies are hybrids of corporations and partnerships.
A LLC is a hybrid entity because it has flexibility in ownership structure and taxation. LLCs are taxed liked partnerships, but offer owners liability protection like corporations. The entities also have a flexible management structure and can be managed by the members or outside persons such as corporations or trusts. LLCs may elect to be taxed as a partnership (default election) or as an S-Corporation.
Should I form my new business on my own, use an online service or use an attorney?
There are many options available to form a business. If you are a seasoned business owner and have formed entities in the past, completing your own forms and filing them may be an option. If you are going to use forms from the internet, make sure to use forms provided by state agencies, bar associations or the state bar. These sites are mostly likely to have forms that are updated to comply with changes in the law and are tailored to the laws in each state. The Secretary of State website is a wealth of information for creating entities and provides forms most of the forms you will need to form a new entity.
If you have never created a business, it is best to seek the advice of an attorney and have him or her assist with the formation of the entity. There is great information out there on the internet (like this article), but the problem with just relying on google searches is you don’t know what you don’t know. When you work with an attorney in forming an entity, he or she can advise you on the best entity structure for the type of business you are creating and provide guidance on steps you should take in setting up your business beyond filing with the Secretary of State.
Online services such as LegalZoom provide a way for business owners to form entities for less than the price a law firm would charge, but the old saying you get what you pay for is very true. LegalZoom and similar sites are simply document preparation services. You answer some questions and the website creates a form. When you hire an attorney to form your entity, you will get the documents you need, and advice about common pitfalls in forming new entities.
For more information on choosing the right entity type for your business, read my post on Choosing the Right Entity or contact me for more information.
Charlotte Key is an attorney that focuses on business law, estate planning and probate law.