Every day I hear the following questions: What is the right business entity for my new business? My husband and I want to start our own home business, what should we do? What is the best entity structure for a real estate business? What kind of entity gives me the best protection from liability while minimizing taxes?
Part of my job as a business attorney is to fully understand what you want to accomplish and then find the best structure that will protect you and your family while reducing business risks. So let's take a quick tour of several types of business entities you might consider starting:
What is a sole proprietorship?
What do I have to do to start a sole proprietorship?
Is the owner of a sole proprietorship protected?
Many of my new clients come in thinking they want to simply run their business under their name personally as a sole proprietor. That structure wins the prize for simplicity. However, it allows creditors or plaintiffs to reach the owner's personal assets (family home, car, or other personal property) in the event of a lawsuit or claim. Additionally, the owner is personally liable for damages that are caused by the business.
What is a partnership?
What do I have to do to start a partnership?
Are the owners of a partnership protected?
Like a Sole Proprietorship, a partnership can be formed without filing anything with the state, when two or more individuals agree to do business together and share the profits. Unfortunately, it has the same pitfalls as a Sole Proprietorship, and each partner is personally liable for damages, and on the hook for money owed to creditors.
Limited Liability Company
What is a Limited Liability Company?
What do I have to do to start a Limited Liability Company?
Are the owners of a Limited Liability Company protected?
A Limited Liability Company (LLC) is a simplified version of a corporation, described below. It protects the owners from personal liability. Unlike the Sole Proprietorship and Partnership, an LLC is only formed by filing with the proper authorities. However, for tax purposes, an LLC has flow-through taxation so you only are taxed individually for the profits that are distributed to you.
What is a Corporation?
What do I have to do to start a Corporation?
Are the owners of a Corporation protected?
A Corporation is the most formal business entity this post will discuss. It requires filing with the proper authorities and also requires more extensive corporate governance formalities (boards of directors, and resolutions for company actions). It protects the owners from liability. For tax purposes, it is taxed as a separate entity, and then the owner's are taxed on their gain, so there is a double taxation that results.
If you have any questions, please feel free to contact us.