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How To Choose The Right Business Entity
One of the first and most important decisions you need to make when starting a business is choosing the right business structure. The type of business entity you form will impact you and your business for years to come. Schwartzberg Law & Legacy Strategies, PLLC helps New Hampshire entrepreneurs and business owners weigh the pros and cons of forming different business entities. Below are the most popular types of businesses you may want to consider forming.
Sole proprietorships are the default entities for single member business ventures, and they are also the easiest to start up.
As the business owner of a sole proprietorship, you have full control over all aspects of the business, but you are also fully liable for all business debts. All income and debts will flow through you personally, and earnings may even be subject to a self-employment tax. While forming a sole proprietorship may be the fastest way to get your business up and running, you are also putting your personal assets on the line in the event of your business’s failure.
Partnerships are similar to sole proprietorships, except they involve more than one business owner. If you are going into business with a partner, you may want to consider forming a basic partnership.
There are two primarily forms of partnerships:
- General partnership: This is the default form of partnership, when 2 or more partners come together to form a business. All owners are personally liable for business debts, and all share equally in the profits of the business.
- Limited partnership: These may only be formed through filing a certificate of limited partnership. They also are composed of two types of partners, general and limited. General partners typically have more control of the business, and as a result are personally liable for business debts. Limited partners have a more limited role, but profits and losses are typically shared in proportion to their capital contributions to the business.
Partnerships are not taxed as individual entities, but rather each partner is individually taxed based on their share of the business’s income.
Corporations are legally independent from their owners. While they protect owners in the event of business failure, there are also a wide range of laws and regulations that corporations must follow. These include forming resolutions, holding annual meetings, recording minutes, and following strict financial record-keeping rules.
As the owner of a corporation, you may have less control over the business’s operations than you would as a sole proprietor. Corporations are primarily run by shareholders and a board of directors, though you may assign yourself to both of these roles to maintain control of your business.
There are two primary types of corporations you may consider forming:
- C corp: These are taxed independently of the business’s owners, though owners may have to pay a tax on any dividends they receive. This can result in double taxation in some cases, unless those dividends are re-invested into the business or owners receive a salary in lieu of dividends. C-corps make it simple to transfer corporate stock, and may make it simpler for a business owner to balance their personal and business finances.
- S corp: These are similar to C corps, but are taxed more similarly to a partnership or sole proprietorship. They also have specific limitations, such as limiting the number of owners to 100.
Both forms of corporation give owners limited liability. An experienced business lawyer can help you evaluate your business goals to determine if the additional limitations of an S corp are worth the tax benefits it may have for your business.
Limited Liability Company (LLC)
If you can’t decide between forming a partnership or a corporation, you may want to form a limited liability company, or LLC. These provide the flexibility and control of a general partnership, with the benefits of limited liability that a corporation would provide.
LLCs are easier and cheaper to form than a corporation in most cases, and require less paperwork and have fewer legal requirements while still preserving limited liability for the owners. While they do cost more to start than a sole proprietorship or partnership, the benefit of protecting your personal assets in the event of business failure may make this a desireable option for you and your business.
Schedule A Consultation To Evaluate Your Options
Forming a business is no easy task. The decisions you make today may very well determine the future success of your business. To ensure you take all the proper steps, it’s best to trust an experienced attorney to guide you through the process.