Founder
When you decide to start a new business, one of the first decisions you and any partners must make concerns your choice of legal entity. This process has significant tax implications and can seem daunting to a first-time entrepreneur.
You can structure your new business in multiple ways, and the right one will depend on your circumstances, needs, and goals. An experienced business law attorney can help you explore your options.
Common Entities Used by New Businesses
Entrepreneurs have multiple business entities to choose from when starting a new business. Some typical choices include:
- Sole Proprietorship – In a sole proprietorship, an individual owns a business without any formal legal structure. The business effectively operates as an extension of its owner. Sole proprietorships can avoid the filing fees and the need to observe various formalities required when operating a legal entity. However, sole proprietorships do not offer business owners protection from the business’s liabilities like other business entities can.
- Corporation – A business may choose to organize as a legal entity called a corporation, which acts as a separate legal entity from the corporation’s owners, who are called shareholders. Management of a corporation comes from its director or board of directors, who may appoint officers to carry out daily tasks while retaining oversight. Although corporations offer limited liability protection to their owners, directors must follow various legal formalities. Entrepreneurs establishing corporations must choose how they want the corporation to be taxed. Federal law taxes corporations under Subchapter C (C-Corp) by default, a form of double taxation where the corporation pays taxes on its net income and shareholders pay income tax on any dividends received. However, eligible corporations may elect Subchapter S (S-Corp) taxation, which passes the corporation’s tax liability to its shareholders.
- Partnership – In the partnership form, two or more parties, called partners, own the business. Partners may include individuals, corporations, or other partnerships and legal entities. Partnerships come in several forms, including general partnerships (where each partner has full management authority and liability for the business), limited partnerships (where passive investors receive limited liability protection), and limited liability partnerships.
- Limited Liability Company – LLCs offer entrepreneurs various benefits similar to corporations and partnerships, including limited liability protection and flexibility in how the company’s owners manage the organization. LLCs also have flexibility in taxation, including choosing between sole proprietorship (when an LLC has one owner), partnership, C-Corp, and S-Corp.
Factors to Consider When Choosing an Entity Type
Entrepreneurs have numerous factors to consider when deciding which type of legal entity to choose for their new business, including:
- Preferred tax treatment, including whether tax liability should remain at the business level and the potential tax liability of owners’ income from the business
- Appetite for operational complexity, including whether owners prefer formal or more informal and flexible legal requirements for management decisions
- Whether the business intends to accept future passive investment
- Whether the owners need limited liability protection
The Importance of Working with an Attorney When Starting a New Business
Choosing a business entity that ultimately doesn’t work out for your new company can be a costly error. An attorney can help you select an entity at the outset that will work with your business plans and help facilitate your company’s future growth. Your lawyer can advise you of your entity options, walk you through the factors you should evaluate, and help you draft legal documents tailored to your business’s needs and goals.
Contact a Business Attorney from LaFountain & Wollman P.C. to Discuss Your Options
Having access to experienced legal guidance can smooth the business startup process and protect your rights and interests. Contact LaFountain & Wollman P.C. today for an initial consultation to discuss your entity selection options and decide on a legal form that meets your new business’s needs.