Choosing the correct business entity for your company is critical since the structure chosen determines how the company will be managed. It also impacts how your business is taxed and your liability for any company debts. The right business entity is the one that fits your needs and minimizes your tax liability and personal liability.
This is the process of creating a business entity to conduct business. There are several types, including sole proprietorships, corporations, limited liability companies, and partnerships. We’ll identify the best fit for your specific business during your consultation.
Choosing the right type of business entity is a critical decision. Each business structure has its own advantages and disadvantages regarding liability and taxation. Based on your working relationship with the other individual(s) involved in the business, you can choose the entity that best suits your situation.
A sole proprietorship is where you own the company without any formal registration with the state. This unfortunately means that you receive no additional liability protections, and will report business income or losses on your personal tax return. Your business is not taxed independently.
While there is no formal registration with the state, many owners apply for a fictitious business, in Texas known as a Doing Business As (DBA), name for their company. Otherwise, the business is simply identified by your name. It is also important to apply and receive an EIN (Employer Identification Number) from the IRS. This allows you to avoid providing your personal social security number when working with clients or vendors.
An incorporated business is a distinct entity–it’s a legal person. It can own property, pays taxes, enters into contracts, can sue and be sued. In a corporation, the owners are shareholders who elect a board of directors, which manages the corporation. In small corporations, owners often are both shareholders and directors.
One distinct advantage of a corporation is that it can limit your personal liability as an owner. Any debts or legal judgment awards incurred against the corporation are often the corporation’s financial responsibility. With some limitations, your personal funds are not used to satisfy these obligations.
The main disadvantage of a corporation is that it can involve double taxation. When the corporation makes a profit and then pays a salary to a director, both the corporate profits and the director’s salary are taxed. An exception is an S corporation, which is taxed like a partnership (discussed below).
You can create the corporation by preparing and filing a certificate of incorporation with the state. Then you’ll appoint a registered agent, appoint directors, and issue stock.
This type of entity occurs where the owners, known as members, collectively manage the company. A limited liability company (LLC) provides limited liability for its members.
Instead of the LLC paying taxes directly, the members report their profits or losses on their personal tax returns in most cases.
Owners create an LLC by filing a certificate of formation, appointing a registered agent, and drafting an LLC operating agreement.
There are many kinds of partnerships – general partnerships, limited partnerships, and limited liability partnerships. The basic concept of a partnership is that the owners–also called partners–possess the authority to manage the business. A limited partnership or limited liability partnership provides some liability protection to the partners.
A partnership is not a separate entity for taxation purposes. The partners report their profits and losses from the business on their individual tax returns.
There is no registration for a general partnership, unlike that of corporations or LLCs. A general partnership is the default business entity type for people running a business together and is best managed through a Partnership Agreement. A partnership with limited liability is required to file a registration with the state.
Choosing the right type of business entity is the key to the smooth operation of your company, as well as minimizing liability and taxation.
It’s not easy selecting the ideal business structure, especially given the range of options and their inherent complexity. The best approach is to start by weighing the working relationship of all owners, your desired liability protections, and your taxation preferences.
By assessing these needs, our expert business law attorneys at Carson Law can help minimize your business’ risk exposure.
If you’re starting a business, whether alone or with others, you likely have questions about choosing the best entity or how to register it with the state. Our expert attorney at Carson Law can answer your questions and help form a strong foundation for your business.