A principal consideration for any business, whether new or existing, is choosing an
appropriate legal entity. Available options in most states include C corporations, S
corporations, general and limited partnerships, limited liability companies (LLCs),
limited liability partnerships (LLPs), and sole proprietorships.
Each type of entity has various advantages and disadvantages. One issue to consider is
tax savings. The proper entity can minimize self-employment and income taxes.
Understanding the total tax situation, including income tax, payroll tax, and estate
tax exposure is essential in determining the choice of entity.
Personal liability protection is often an owner's main objective in choosing the
appropriate entity. Operating as a proprietorship or general partnership offers no
owner liability limitation. Limited partnerships, LLCs, LLPs, S corporations, and C
corporations provide varying degrees of liability protection for the owners depending
on state law. For sole owners, the single-member LLC is a popular liability-limiting
alternative to a proprietorship.
If a business is owned by more than one individual, it cannot be run as a
proprietorship. If all owners provide management services, a limited partnership is
not a viable option because that would jeopardize their status as limited partners.
Limited partnerships, LLPs, LLCs, C corporations, and S corporations allow for
management by multiple individuals without limitations.
In many cases, a change in entity status is sought to accomplish a transition in
ownership. Whether the objective involves moving ownership to a successor via gifts,
an installment sale, a stock redemption, a bequest, or a combination of methods, it
is often necessary to use a different form of entity to meet these objectives.
Each entity selection situation is unique. The business owner's objectives must be
systematically matched with the various entities' attributes. All major tax and
nontax issues must be considered and alternatives explored before choosing the
appropriate structure for your business.
As with most business decisions, meaningful, up-front planning will have a positive
and lasting effect on your business venture. Please call us with questions about the
appropriate entity structure for an existing business, a business you intend to
purchase, or a contemplated new start-up business.
This publication is distributed with the understanding that the author, publisher and
distributor are not rendering legal, accounting or other professional advice or
opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2015