BUSINESS PLANNING & BUSINESS FORMATION ATTORNEY

You have a great idea for a new business. Working with a business planning attorney can help ensure your company is set up with the right legal structure from the beginning. You spend hours researching what you need to do to get started. You open a bank account, rent an office, and send out promotional mailers. A friend reminds you that you need to register your business with the Secretary of State, so you visit the website and fill out the form to the best of your knowledge. Your business takes off, and you don't give another thought to how you set up your entity. 

Fast forward a few years. You're involved in an accident while at work that leaves another person severely injured. You receive notice that you're being sued personally. How can this happen? Aren't your personal assets protected from what happens with your business? This unfortunate scenario is the result of inadequate business planning and improper business entity formation.

When establishing your business entity, it's essential that you understand the different legal structure options and how they affect liability, taxes, and ownership, along with their advantages and disadvantages. By working with your CPA, a business planning lawyer can help you create a business structure that provides liability protection and tax benefits.

Some of the main benefits and drawbacks of different types of business entities and legal structures include:                                

Sole Proprietorship

A sole proprietorship is the simplest form of business structure and is commonly used by small business owners.

Advantages:

• Easy to create and maintain

• The business and the owner are legally the same entity

• No fees associated with the creation of the business entity

• The owner may deduct a net business loss from personal income taxes

Disadvantages:

• The owner is personally liable for any debts, judgments, or other liabilities of the business

• The owner must pay personal income taxes for all net business profits

General Partnership

Partnerships allow two or more individuals to share ownership of a business.

Advantages:

• Easy to create and maintain

• No fees associated with the creation of the business entity

• Owners may report their share of net business losses on personal income taxes

Disadvantages:

• All owners are jointly and personally liable for any debts, judgments, or other liabilities of the business

• Owners must pay personal income taxes for all net business profits

Limited Partnership

Advantages:

• Easy to attract investors as they are only liable for the total amount of their investment in the business

• The limited partners enjoy limited liability for any debts, judgments, or other liabilities of the business

• The general partners are freer to focus their attention on the business

• General partners are able to raise cash without diminishing their control of the business

• Limited partners can leave the business without dissolving the limited partnership

Disadvantages:

• General partners are jointly and personally liable for any debts, judgments, or other liabilities of the business

• Can be more expensive to create than a general partnership

• Mainly suited to businesses such as real estate investment groups or in the film industry

C Corporation

Advantages:

• Owners of the business enjoy limited liability for the business's debts, judgments, and other liabilities

• Some benefits may be deducted as business expenses

• With good accounting, owners and businesses may be able to pay lower taxes by splitting the business profits among owners

Disadvantages:

• More expensive to establish than a sole proprietorship or partnership

• Complicated paperwork that must be filed with the Secretary of State

• Corporations must pay their own taxes as a separate tax entity

S Corporation

Advantages:

• Owners of the business enjoy limited liability for the business's debts, judgments, and other liabilities

• Owners share the net profits of the business and report their share on personal income taxes

• Owners share the net business loss and can offset other income by reporting this loss on personal income taxes

Disadvantages:

• More expensive to establish than a sole proprietorship or partnership

• Paperwork is more complicated than the paperwork required for an LLC, but similar advantages

• The ownership interest of the various owners determines their respective incomes from the profits of the business

• Some benefits are only given to owners who have more than 2% of the business's shares

Limited Liability Company (LLC)

A limited liability company (LLC) is one of the most common business structures for small businesses because it provides liability protection and flexible tax treatment.

Advantages:

• Owners of the business enjoy limited liability for the business's debts, judgments, and other liabilities, even if the owners engage in significant control of the business

• The business profits and losses can be allocated to the owners along different lines than ownership interest (for example, a 10% owner may be allocated 30% of the business's profits)

• Owners can choose how the LLC will be taxed, either as a partnership or a corporation

Disadvantages:

• More expensive to establish than a sole proprietorship or partnership

Limited Liability Partnership

A limited liability partnership (LLP) is commonly used by professional service businesses such as law firms, accounting firms, and medical practices.

Advantages:

• Business entities associated with things like law, medicine, and accounting normally use this

• Partners are not liable for the malpractice of other partners

• Partners take their share of loss or gain on their personal income taxes

Disadvantages:

• Partners remain personally liable for obligations to business creditors, landlords, and lenders

• Not every state allows limited liability partnerships

• Often limited to only a select few professions