It’s 2013; it’s the start of a new year and the time to start a new venture. What type of legal structure is right for your business? That’s not for me to say.
All can advise is that you be educated about the decision you make. To that end, today’s post is not meant to answer any questions. Instead, it’s to help you wade through the legal acronyms so you can actually compare the pros and cons of each available organizational structure for your business.
By no means is this an encyclopedic offering. It may only qualify as a simplified beginning. Hopefully it helps you sort out the language.
The Doing-Business-As (DBA)
Pros: Also known as a Sole Proprietorship, the DBA is simple and inexpensive to create and operate. Owner reports profit or loss on personal tax return (“pass-through” taxation). Able to raise capital publicly or privately. Fewest formalities and regulations involved (i.e. don’t need to register at state level).
Cons: The owner is personally liable for business debts (personal assets unprotected). It’s difficult to raise capital because there is less peace of mind for the investor, whose personal assets may not be protected. Lack of prestige without “LLC” or “Inc.” following company name.
The Limited Liability Company (LLC)
Pros: Owners of an LLC have limited personal liability for business debts even if they participate in management (personal assets protected). Profit and loss can be allocated differently from ownership interests. IRS rules now allow LLCs to choose between being taxed as partnership or corporation. Raising capital is simple, though restrictions apply. One person may hold 100% of the interest. User-friendly and the most popular entity available.
Cons: More expensive to create than a Sole Proprietorship. Some formalities are required. State laws for creating LLCs may not reflect latest federal tax changes.
The General Partnership (GP)
Pros: The general partnership is simple and inexpensive to create and operate. Owners (general partners) report share of profit or loss on personal tax returns (“pass-through” taxation). Requires few formalities (easy to establish).
Cons: Owners (general partners) personally liable for business debts (personal assets unprotected)
The Limited Partnership (LP)
Pros: The limited partnership permits any number of limited partners who have limited personal liability for business debts (personal assets protected). Owners (partners) report share of profit or loss on personal tax returns (“pass-through” taxation). Require few formalities (easy to establish), which makes it more difficult for the limited partners to be exposed to liability.
Cons: At least one general partner is required with personal liability for business debts (personal assets unprotected).
Limited Liability Partnership (LLP)
Pros: Owners (partners) have limited personal liability for business debts (personal assets protected). Owners (partners) report share of profit or loss on personal tax returns (“pass-through” taxation).
Cons: Must always have at least two partners. Difficulty transferring interests.
Regular Corporation (C-Corporation)
Pros: Most prestigious type; conveys permanence. Owners have limited personal liability for business debts (personal assets protected). Fringe benefits can be deducted as business expenses. Owners can split corporate profit among owners and corporation, paying lower overall tax rate. Raising capital is simple, though restrictions apply.
Cons: More expensive to create than a Sole Proprietorship and requires more formalities than an LLC. Paperwork can seem excessive. Generally complicated to run. Separate taxable entity (“double” taxation).
S-Corporation
Pros: Prestigious, like C-Corporation. Owners have limited personal liability for business debts (personal assets protected). Owners (partners) report share of profit or loss on personal tax returns (“pass-through” taxation). Owners can use corporate loss to offset income from other sources. Raising capital is simple, though restrictions apply. Can revert to C-Corporation with ease.
Cons: Expensive to create. More paperwork than LLC though it offers similar advantages. Many formalities required, as with C-Corporation. Income must be allocated to owners according to their ownership interests. Fringe benefits limited to owners who own more than 2 percent of shares.
As we said, it’s not even a start. But perhaps it is a beginning.
As always, good luck, good hunting and also a Happy New Year!
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The Fisher Law Office is renowned for its experience in estate planning, probate administration, asset protection, and business development. Annapolis attorney Randall D. Fisher has practiced for over 20 years, maintains the highest peer review rating for ethics (AV Preeminent) by Martindale-Hubbell, and is a sucker for long walks on the fairways.
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