Entrepreneurs starting a new business often want to protect their personal assets and avail themselves of liability protection afforded by various types of business organizations.
But what kind of business organization? There is an “alphabet soup” of entity types from which to choose: corporations (“S” Corps or “C” Corps), limited partnerships (LPs), limited liability partnerships (LLPs), limited liability limited partnerships (LLPs), limited liability companies (LLCs) and, within those categories, some variations depending on the nature of the business (such as professional corporations and restricted professional companies).
To add to the confusion and complexity, different tax elections are available for different organizations. LLCs may be “disregarded entities” (virtually ignored for income tax purposes) if they have one owner, treated as partnerships (if they have more than one owner), or taxed as corporations (either S corporations or C corporations) if they so elect.
There are “pros” and “cons” to each business organization and each tax option. Key considerations include the type of business activity, the number of owners, expected financial performance in the near and long term (will there be near-term losses that the owners may want to deduct?), the type of investment that the owners or partners intend to make, how the owners will be repaid their investment in the enterprise, whether there will be different classes of ownership, how the owners expect the organization to be managed and, tax considerations. Some entities (LLPs) only provide liability protection for certain categories of claims (such as tort claims), but not others (such as trade debts and contract claims).
Choosing the appropriate form of entity is one of the most important decisions a business owner can make, and should be given careful consideration in consultation with competent legal counsel and an accountant. Changing from one form of entity to another can be expensive or even cost-prohibitive for tax and other reasons. Please see a more depth look at: “How to Choose between an LLC and S-Corporation.”
For more information, contact William J. Burke, III.