Business Law
Choice of Entity
Choosing your entity means choosing the organizational structure of your
business. For example, you might choose sole proprietorship over incorporation.
Choosing the right entity for your business can be like putting on your
business pants. You don't leave home without your pants because you don't
want to expose your personal assets, right? Choosing the right pants for
your business can keep your personal assets from being exposed as well.
You can do business in North Carolina as a sole proprietor, a partnership,
a Limited Liability Company or a Corporation. Your choice of entity for
your business depends upon the nature of your business, your exposure to
risk, the anticipated growth of your business, the number of employees you
have, and your desired tax treatment. Selecting the best entity for your
business venture must follow a careful review of these factors. The advice
of an attorney and accountant with expertise in business formation and tax
is fundamental for choosing your entity.
Sole proprietorship
Sole proprietorship is the simplest form of doing business. A sole proprietorship
is not an independent entity, but rather an individual doing business on
his/her own behalf. The primary downside to operating as a sole proprietor
is the lack of limited liability. If the business is unable to pay its debts
or gets sued and becomes liable for a judgment in excess of insurance coverage,
the owner is individually responsible for that debt and the owner's personal
assets are exposed to the collection efforts of the judgment holder.
General Partnership
A partnership is created when two or more people or entities join in a business
for profit. Partnerships are easily formed, sometimes even by accident.
LLCs and corporations can enter into partnerships. Partnerships are often
attractive because of the pass-through tax treatment they receive- that
is, the profits and losses of the partnership pass through the business
and are reported on the partners' individual tax returns, to be assessed
at individual tax rates. Like sole proprietorships, partnerships do not
limit the partners' personal liability, so if the partnership owes a debt,
the partners are personally liable for the debt. Also, there is unlimited
liability between partners, so all partners are individually liable for
the acts of another. For these reasons, partnerships are often best suited
for joint ventures between entities that already enjoy limited liability,
like LLCs or corporations. General partnerships may also be attractive where
there is low risk for exposure to liability. Businesses exposed to significant
liability such as risk of injury to others should choose a limited liability
entity- an LLC or corporation.
Corporations
The corporation is the classic business entity that protects the owners
from personal liability. Corporations are creatures of statute specifically
designed to encourage business owners to enter the marketplace by limiting
the risk to the owner's investment if the business fails, absent proof of
fraud or corporate impropriety. Corporations also provide an efficient vehicle
for ownership by many individuals, generally called stockholders. Selling
partial interest ("shares") of the corporation to individuals allows the
corporation to raise capital without involving the stockholders in management
or other business functions.
Tax treatment is an important issue for corporations. For small businesses
that meet certain criteria and have 75 or fewer stockholders, an S-corp
may be attractive because it receives pass-through tax treatment of profits
and losses similar to a partnership. For large business ventures, a C-corp
is preferred due to its ability to issue unlimited shares. However, a C-corp
files its own tax return, paying tax based on the corporation's profits
and losses. The stockholders also report profits and losses they realize
from dividends paid by the corporation, resulting in double-taxation.
Limited Liability Company
Limited Liability Companies, or LLCs, combine some of the characteristics
of both partnerships and corporations, making them very attractive business
vehicles for many ventures. LLCs provide the owners with limited liability,
but allow pass-through taxation. The IRS permits some LLCs to elect tax
treatment as an S-corp. If doing so will generate tax benefits for your
business, you will need the skilled assistance of an accountant and attorney
to make this election.
LLCs are owned by "members." The members may or may not be involved in management
or other business functions. LLCs generally require fewer formalities than
corporations, making them ideal for small or closely held business ventures.
LLCs can be formed for professionals like lawyers and accountants, and these
are generally indicated by the designation "PLLC."
Contact DeWitt Law to assist you in choosing
the right business entity.