There are various types of entities to consider when starting a business. Choosing the right entity is crucial. Some of the factors to consider in determining which entity is appropriate for you include the nature of the business to be conducted, the property to be owned, estate planning concerns, tax considerations and flexibility with ownership. The most common types of entities are sole proprietorship, partnership, corporation and limited liability company.
A sole proprietorship is a default business entity with one owner who is not separate from the business and reports profit and losses on his or her personal tax return. The owner is liable for all acts committed in furtherance of the business and therefore this entity is typically not recommended for an active business.
A partnership is made up of two or more persons who operate a business and share in the profits and losses of that business. The partners are liable for the acts of the business and one partner may be liable for the acts of the other partner. This entity is not normally recommended for an active business due to the inability to shield the owners from personal liability; however, its favorable tax treatment sometimes draws owners to this type of entity.
A corporation is a separate legal entity capable of suing and being sued, as well as holding property in its own name. Its profits and losses are reported on a separate tax return. The owners of a corporation are usually protected from personal liability. Because of the limited liability associated with this entity, a corporation is a good choice for an operating business.
A limited liability company offers both the limited liability protection of a corporation and the favorable tax consequences of a partnership and therefore is becoming the entity of choice among many business owners. Careful consideration however must be given to the operating agreement among owners since this entity is relatively new and therefore there is not much case law interpreting the statutes governing this entity.
Contact Stein Sperling to discuss in greater detail the nature of your business, as well as the business and tax considerations associated with the different types of entities. We can assist you as you consider which entity type is best for your business.