How To Choose A Business Entity

By Dan Handle, 19 Jan 20:14

There are many choices so find one that matches your needs:

Limited Liability Companies
Awarded favorable tax status in 1988 by the IRS, a Limited Liability Company (LLC) is the newest kind of business entity available to owners. The LLC generally combines the tax characteristics of a partnership with the liability benefits of a corporation. An LLC can be organized by one or more persons. The company interests are then sold like shares to the owners, or "members," of the LLC. An LLC may designate one or more managers to operate its business, or it can choose to operate under the direction of its members. The LLC's governing document is called an operating agreement, a document not unlike a Partnership Agreement.
Advantages:
Easy to form, and somewhat easy to discontinue.
Broader management base, as members can pool their talents and resources.
Expanded ability to raise capital.
Liability of the LLC's members is limited to each one's personal investment. Investors in an LLC do not face personal liability for the debts or obligations of the LLC.
Flexibility. Unlike an S-corporation, an LLC can be structured to allocate the profits of the business differently among the various members, while at the same time preserving flow-through tax treatment.
Disadvantages:
Fairly complex tax filing system.
More restricted process of transferring ownership.
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More expensive to organize than a sole proprietorship or partnership.
Members are generally responsible for their own actions and the actions of the business. However, unlike sole proprietorships and partnerships, members are not responsible for employee actions simply because they own the business. Members' personal assets are vulnerable in a lawsuit, although the business's assets are taken first.
Could be Good/Could be Bad:
Authority is divided among the LLC's members.
LLC members divide profits according to the operating agreement.
Members report their share of business income on individual tax returns. The business does not pay taxes as its own entity.
Income and losses of the business flow through to the members, and are reported only once on each one's personal income tax return.
Heard enough? We could go into more details (but we won't). By now you should have a pretty good idea of how to begin your own business venture. What now?
Next Steps:
Seek legal counsel from an attorney, CPA or other tax professional or advisor. In most cases you should NOT form your business entity without first consulting with at least one of these professionals. Moreover, you can and should seek the expert advice of various local (and free) advisors.
Again, these include your state's Small Business Administration (SBA), the Service Corps of Retired Executives (SCORE) or your local Chamber of Commerce's Small Business Development Center. It wouldn't hurt to contact the "taxman" himself, either. After all, it is the IRS whose good side you want to stay on.


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