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BUSINESS FORMATION & PLANNING
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Why should you spend precious resources on business planning?
Launching a new business venture is one of the most exciting and challenging events of a career. With risks and pitfalls at every turn, the wise entrepreneur invests in up front planning so that their business is built on a solid foundation. Planning on the front end means less headaches and unexpected problems once your business is up and running -- a time when you can least afford the time and expense of putting out fires. |
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BUSINESS ENTITY DESCRIPTIONS
The following list provides a brief description of the most common types of entities available in most jurisdictions, i.e., Sole Proprietorship , Partnership/Joint Venture , Limited Partnership (LP) , Limited Liability Partnership (LLP) , Limited Liability Company (LLC) , S Corporation , C Corporation (regular corporation) , and Nonprofit Corporation . The descriptions explain some of the pros and cons applicable to these various types of entities. Notably, the list proceeds from the simplest to the more complex forms of entities, and from the least to the greatest protection against personal liability.
DISCLAIMER: This page does not provide an all-inclusive list of every type of business entity, nor a complete description of all of the issues to be considered in selecting an appropriate entity. Competent legal counsel by a licensed attorney should be obtained regarding the choice and formation of a legal business entity.
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- PARTNERSHIP / JOINT VENTURE
- LIMITED PARTNERSHIP (LP)
- LIMITED LIABILITY PARTNERSHIP (LLP)
- LIMITED LIABILITY COMPANY (LLC )
- S CORPORATION – An S corporation is a corporation organized under state law that has elected to be treated as a subchapter S corporation under federal tax law. Sections 1361 through 1379 of Subchapter S in the Internal Revenue Code provide special requirements for obtaining and maintaining S corporation status.
- PROS:
- The personal liability of an S corporation shareholder is limited to their contribution of capital to the S corporation, which means that if someone sues the business and wins, they can attach a judgment against the capital contribution of the shareholder(s), but not the personal assets of the shareholder(s) (unless the corporate veil is pierced).
- There is no double taxation applicable to S corporations. S corporations are pass-through entities if the applicable federal tax rules are followed (e.g., earnings and profits of S corporations must be distributed to shareholders annually as dividends). There is no business entity level tax, but the S corporation must file an informational federal return (Form 1120S) and K-1 forms must be sent to each shareholder representing their distributions from earnings and profits.
- S corporation shareholders can participate in the management of the business.
- Due to recent changes in the tax law, dividends distributed to S corporation shareholders are taxed as capital gains (generally, 15%).
- CONS:
- There are corporate formalities to conduct and maintain, such as organizational and annual meetings, corporate minutes, etc.
- All income must be distributed to the shareholders annually.
- Specific rules must be followed in order to maintain S corporation status:
- An S corporation must be a domestic corporation and not an ineligible corporation (an ineligible corporation includes a financial institution, which uses the reserve method of accounting for bad debts, an insurance company subject to tax under Subchapter L, a corporation to which an election under section 936 applies, or a DISC or former DISC).
- An S corporation cannot have more than 75 shareholders.
- An S corporation cannot have a shareholder who is not an individual (certain narrow exceptions apply).
- An S corporation cannot have a nonresident alien as a shareholder.
- S corporation cannot have more than 1 class of stock.
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This website is designed for general information only. The information presented on this website should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.
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