Selecting the appropriate business structure can be a difficult, but important part of your business venture. There are a variety of considerations, such as reducing personal liability, ability to transfer ownership, voting rights, tax implications, and the costs involved in creating the right structure.
Each business entity has its own unique advantages and disadvantages, for example:
A Sole-Proprietorship does not require formalities, separate bank accounts, but you may still be required to get certain licenses and permits. In addition, your personal assets are exposed to any claims made against the business.
A Corporation has the advantage of creating a separate legal entity and protects you and your personal assets from claims against the business. The Corporation can raise funds, hold assets, transfer assets, but requires formal documents (such as, Articles of Incorporation, Shareholders Agreements, By-Laws, Minutes, Officers, Consents, a Board of Directors, and Annual Reports).
A Close Corporation allows the owners to operate the Corporation without a board of directors, but requires an election and Amended Articles of Incorporation to be filed with the Secretary of State’s (SOS) Office. However, a Close Corporation requires some restriction on stock transfer.
An S Corporation avoids having to pay taxes as a Corporation, but has formalities regarding elections with the IRS, disbursement restrictions and restrictions on the size of business that can operate as an S corporation.
A C Corporation must pay taxes as a corporation, but avoids disbursement and size restrictions.
A Limited Liability Company (LLC) creates a similar separate legal entity to a Corporation and protects against exposing an owner’s personal assets to claims against the business. The LLC can raise funds, hold assets, transfer assets, but requires formal documents (such as, Articles of Organization, Operating Agreement, Written Consents, Members and/or Managers, and Annual Reports). However, the initial filing fees for a LLC are slightly higher than a corporation.
Partnerships allow individuals join together and carry own as co-owners of a business. Partnerships are separate legal entities that can own and transfer assets and pay taxes. However, the partnership does not incur a separate tax such as corporate tax. Typically, a written partnership agreement should be prepared, but it does not have to be filed. However, general partnerships do not permit the partners to shield personal assets from claims against the business.
Limited Partnerships require a statement of qualification to be filed with the SOS’s office. These are similar to a general partnership, but limited partners are not liable for the wrongdoing or mistakes of other partners.
These are just some of the considerations that go into creating and selecting the appropriate business structure. Some others are ownership and licensing of intellectual property, need to avoid commingling of funds, ability to transfer ownership of business and business assets, accounting compliance, etc. Selecting a business structure is often dependent on the business plan of the owners.
If you have any concerns or questions regarding selecting the right business structure for you, then please feel free to contact us.