Choosing the right business entity and forming your company is essential if you want to limit your personal exposure and liability. torres|benet, p.a. is committed to helping you find the right business entity to help you meet your goals.
Setting up a business provides significant tax advantages and creates a legal distinction between the individual owners and the business itself. This separation shields owners from liabilities arising from debts and other issues of the business. In addition, establishing a legal entity legitimizes your business from the perspective of stakeholders and other third parties such as customers, vendors and investors.
In order to create a business entity, you’ll need to file appropriate legal documents, pay required filing fees and, in some cases, meet additional requirements. The requirements vary based on the type of business formation you choose and the state in which you form your new entity.
Q: When should I form my company?
A: It’s important to speak with a lawyer early about forming your company, as the circumstances of each individual case will affect proper timing.
Q: Which entity should I choose for my company?
A: Generally, operating as a C-corporation is the best route if you aim to take on investment, and ultimately go public. If you have other goals for your business, other business forms may be better suited to you. You should consult a lawyer about the best entity for your company.
Q: Where should I form my business?
A: If you are planning on seeking venture capital, Delaware’s extensive body of corporate law make it a popular state for incorporation. However, there are other considerations that might make forming your business elsewhere more desirable. A lawyer can advise you on the best state to incorporate based on your goals.
A C Corp is a legal entity that formally separates owners (the shareholders) from the corporation, such that shareholders are not personally liable for the debts or liabilities of the corporation. C Corps are subject to “double taxation,” meaning the corporation is taxed on its net income, and shareholders are also taxed when the profits are distributed. If you plan to raise outside investment or have aspirations to take your company public, then a C Corp is traditionally the right entity form.
An S Corp is formed by filing for special tax status with the IRS. S Corp status provides pass through taxation, which means there is no tax at the corporate level, only when profits are distributed to shareholders. This tax-status causes significant limitations on who may be a shareholder, the number of shareholders and the stock classes.
LIMITED LIABILITY COMPANY
An LLC combines the limited liability of a corporation with tax efficiency (i.e. no double taxation) and operational flexibility. However, the tax benefits and increased flexibility increase tax and accounting complexity. Further LLC’s are normally unattractive for outside investors and limitations on capital structure.
A sole proprietorship isn’t a separate legal entity, it is an unincorporated business run by one person. Because forming a sole proprietorship requires no formal action, it is the simplest and least expensive of all business forms. Sole proprietorship status automatically results from conducting business activities but creates no legal separation between you and your business. In a sole proprietorship, you are personally liable for all activities of the business, all expenses and all debts of the business as well as the tax obligations.
A general partnership is an association of two or more people conducting a business as co-owners. General partnerships can be formed by entering into a partnership agreement or by default when two or more partners act in concert. The partnership functions as a separate entity, but the liability of each partner is unlimited, both with respect to his own acts as well as acts of other partners.
A Limited Partnership is a variation on the general partnership. The entity consists of a combination of general partners, who manage the business and take on liability, and limited partners, who usually contribute capital, but only have limited liability. Unlike an LLC, there must be at least one managing partner who bears liability for the partnership’s actions.
When your company’s mission will be to support a charitable cause, you’ll want to consider forming a nonprofit corporation. To receive all the benefits and obtain private and public grants, low-cost postage rates, exemptions from income, sales and property taxes, and the ability to receive tax-free donations–a nonprofit must be registered with its state of operation and file for (501(c)(3)) tax-exempt status with the Internal Revenue Service. Every 501(c)(3) organization is classified as either a public charity or a private foundation, depending primarily on the level of public involvement. A private foundation is typically funded and managed by its own trustees or directors, while a public charity derives its funding from the general public.
CHOOSING THE RIGHT BUSINESS STRUCTURE
Choosing the right business structure is one of the most critical decisions that that you can make for your business. The right business form can reduce exposure to liabilities, confer tax advantages and ease the process of financing and running your company.
The legal costs to form a business vary, schedule a consultation with torres|benet, p.a. today to get an estimate of how much your particular company will cost to form.
The material on this page has been prepared and or compiled by torres|benet, p.a. for informational purposes only. RECEIPT OF THIS INFORMATION DOES NOT CREATE AN ATTORNEY-CLIENT RELATIONSHIP.