Entity Formation and Business Planning
The decision about what business entity to select for a new venture has critical implications for liability and tax consequences. This can affect the stakeholders of the entity as well. There are different rules and regulations that apply to each business form. Here are four of the most common to help with your entity formation and business planning:
This is the most basic of the business entities. Therefore, it is appropriate if the owner and manager of the business are the same person. Any income you generate from this business, you can claim as personal income, rather than requiring filing a business return. This also means that any risks and liabilities fall on the individual instead of a business entity. Sole proprietors are bound by any applicable licensing laws. Furthermore, they must abide by employment laws if they hire any employees.
There is at least one general and one limited partner under this entity structure. There are benefits to this as long as they do not participate in the direct operation of the business. One of the greatest benefits is the limitation of liability. General partners are responsible for the running of the business. They also share liability for business debts and obligations.
In deciding to form a corporation, whether a “C” or “S” type, it involves the creation of an entirely new legal entity, once all the formalities have been complete. There are very specific requirements for the formation and operation of a corporation. Yet, the entity is responsible for its own obligations. Therefore, providing a legal shield for the officer, directors, and owners of the corporation. It is important to recognize that the legal benefits also come with tax consequences and restrictions. These are on the bases of the actions that may be carried out under the corporate structure.
Limited Liability Companies
This is commonly known as “LLC,” this type of entity combines characteristics of both Partnerships and Corporations. It enjoys the flexibility of a Partnership while its members have a limitation of liability. This usually goes to shareholders of a Corporation. Due to its mixed features, an LLC can choose to be taxed as a Partnership or as a Corporation. In order to determine which tax method to use, it is important to analyze the goals of the company.
The reality is that there are many different types of business entities that may take form in relation to the goals and needs of the individuals embarking on the new venture. It is important to discuss the plan for the business with an experienced corporate attorney. This provides expertise to select the form that will be most effective. At Brunoro Law, we offer a one-hour free consultation to outline a potential strategy for you and your new business.