Many individuals have traditionally operated a business as a sole proprietorship. A sole proprietorship exists when an individual simply chooses to do business under a given business name, or his or her own name. When two or more people engage in a business operation, it is called a general partnership or joint venture. While these forms of business operations work well for many people, they often lack the structure people need to operate efficiently.
There are several types of formal business entities. These include ccorporations, limited liability companies, and limited partnerships, and each have their own advantages. In general, these entities limit personal liability for business debts and obligations. They also have defined management, and are governed or controlled by the owner(s) of the business.
There are significant tax differences and benefits associated with each type business entity. A financial consultant, such as an accountant, can best advise you on any tax questions. That individual should work closely with your attorney to best address your needs.
If you intend to remain in business for any substantial period of time or wish to avoid certain liabilities, you should speak to an attorney about forming and structuring a business entity. The attorneys at Schuh & Goldberg, LLP can answer all of your questions and assist you in choosing the best business entity for you.
LLC's - Limited Liability Companies and related entities
All states permit limited liability companies. An LLC is a legal entity separate and apart from its members. The members of an LLC are not personally liable for the company’s debts and obligations, unless they have specifically agreed otherwise. An individual does not lose that limited liability by being an active member of management. An LLC maybe managed by a manager, or members designate a manager. Alternatively, the members may directly control the LLC.
An LLC’s ownership interest consists of monetary rights and rights to management. The monetary right is the right to share in the profits and losses, and receive distribution. Those rights are personal property and can be transferred. However, there are restrictions on the rights to participate in the management of an LLC.
An LLC is entitled to flow-through taxation. This means that each member’s share of profits and losses are taken on that member’s own personal income tax liability. Flow-through provisions may apply to state taxes as well.
The LLC can have a perpetual existence and may include only one person. For those persons wanting the protection of limited liability and flexibility in control of a company, an LLC is often a very good choice.
C Corps. - S Corps
A corporation is a business entity that is owned by its shareholders. Shareholders are not personally liable for the debts of the corporation. Governing occurs through a board of directors, consistent with applicable state law. Corporate shares are generally easily transferrable, and the entity provides for perpetual existence.
A Company may be known as either a “C” corporation or an “S” corporation. Most large corporations are “C” corporations. The main difference between a “C” corporation and an “S corporation concerns limitations to the corporation’s stocks and the tax treatment of profits and losses.
A “C” corporation is not entitled to flow-through tax benefits. The corporation must file a corporate tax return and pay corporate tax. Therefore, there is a double taxation on a “C” corporation=s income.
An “S” corporation is a corporation that has filed an election with the IRS, consented to by all of the shareholders. There are limitations in the number of shareholders and the types of stock that can be issued. Only certain types of individuals or entities may be shareholders. One potential advantage of an “S” corporation is that that the “S” corporation is entitled to flow-through taxation. The “S” corporation does not file a separate return. The profits and losses pass through to the individual shareholders. See your tax advisor in making these elections.