How to Choose the Right Entity for Your Business

One of the most important issues facing the Owners of a new business – or the owners of an existing sole proprietorship or partnership who desire asset protection - is how to choose the right entity for their business.

Like many areas of life, there is no "one-size fits all" approach that is right for every client.

It is important that you consider the following issues before deciding:

Number of Shareholders or Owners

"C" corporations have no limit on the number of shareholders they may have. "S" corporations are limited to 75 shareholders and there are certain restrictions on who (or what) may qualify as a shareholder of an "S" corporation. While a Limited Liability Company (LLC) has no direct limit on the number of members it has, they are clearly designed for smaller businesses in general.

Asset Protection

Entities such as the Corporation and Limited Liability Company (LLC) offer their shareholders limited liability from the obligations of their business. The general rule is that: if your Corporation or LLC is sued, you can lose your investment in the Company, but your personal assets outside the business should be protected.

Entities like General Partnerships do not offer limited liability for their partners. Limited Partnerships only offer limited liability to its Limited Partners - not to General Partners who are involved in the managing of the partnership.

Pass-through Taxation

"C" corporations by definition have two-levels of tax: the corporate level, and the personal level (for dividends distributed to shareholders). Other entities, such as Partnerships, "S" Corporations, and most Limited Liability Companies, offer pass-through taxation. In these cases, there is no "entity-level" tax for Federal Income tax (although some State taxes may apply to the business). Income passes directly through to the Shareholders, and is reported on their individual tax return.

Ease of Use

While Corporations offer many benefits to their Shareholders, they do involve "Corporate Formalities" which must be observed in order to preserve asset protection. Failure to "observe the corporate form" may lead to a plaintiff or creditor piercing the corporate veil. The theory goes: if you do not respect your corporation or LLC as an entity separate from yourself, then neither will a court of law. If the corporate veil is pierced, then creditors may be able to go after your personal assets to satisfy judgments against the business.

As a general rule, Limited Liability Companies have fewer "formalities" that must be observed. This means that it is much harder for a creditor to "pierce the corporate veil", and thus enhancing the creditor protection of the LLC. Their ease of use are one of the primary benefits of an LLC.

By: John Fraker
Credit:www.superfeature.com