Business Incorporated Options

Experienced Business Incorporated Lawyers

Selecting the Right Entity for Your Business

So, you are thinking of starting your own business or you have already started and are beginning to have some cash flow and are concerned (and rightly so) about liability. The first of many decisions you need to make is what type of business entity is best for you. Each type of business entity has its advantages and disadvantages. Two factors to consider are liability protection and taxes. Let the Sacramento business law firm of Litchney Law Firm help you sort through these and other factors in order to make a decision on your business incorporated options.

There are four basic types of business entities;

  • Sole-proprietorships
  • Partnerships
  • Corporations (S corp, C corp, Professional, NonProfit)
  • Limited Liability Companies

Each has its own advantages and disadvantages. Consider these factors when choosing which is right for your business: Tax aspects, legal requirements and the potential for personal liability. We are experienced with all types of business entities and business incorporated options, and can counsel you on the best one to suit your needs.

Sole-Proprietorship

A sole-proprietorship is a business that is owned by a single individual (or by a husband and wife) that is not a corporation or a limited liability company. There are no legal requirements to comply with in order to create and maintain the business structure. The biggest disadvantage is that you, the business owner, are held personally liable for the debts of the business. This means that if someone sues your business and obtains a judgment against it, you will be responsible for paying it even if it exceeds the entire worth of your business. You should evaluate the potential risk of this kind of liability for your type of business to determine whether you should operate as a corporation or limited liability company instead. This structure is also at the highest risk of expensive and time consuming IRS audits.

Please contact our firm to consult with one of our attorneys who practices in the area of business law can help you make this determination and can also help you understand which business structure makes the most sense for you from a tax perspective.

Partnership

A partnership is a business that is owned by more than one individual (not a husband and wife) that is not a corporation or limited liability company. Nothing is required to establish the business as a partnership, it happens automatically when two or more people own a business that is not a corporation or a limited liability company. However, it is a good idea to have a written partnership agreement which spells out the commitments of the parties, including how much and what they will contribute to the business, how they will draw profits and share losses, and who will have authority and responsibility for making various decisions among other things. If the owners of the business do not make a written partnership agreement, state partnership law determines the obligations of the owners.

Corporations

A corporation can be owned by one or more individuals. Each state’s laws spell out the requirements for setting up a corporation in that state. Generally, establishing a corporation involves drafting Articles of Incorporation and Bylaws and issuing stock. The Articles of Incorporation are filed with the State and a Certificate of Incorporation is issued to the business. The main advantage of operating a business as a corporation is that the liability of the owners for the debts of the corporation is limited to their investment in the business. The biggest disadvantage is that the business must adhere to the corporate structure by conducting an annual shareholders and directors meetings, which can be cumbersome for a small business.  However we can guide you and take care of these details for you for less than you would think each year as we do for many of our clients.

Not every corporation is a C-Corporation or an S-Corporation. If certain professionals (i.e. Doctors, Lawyers, Accountants etc.) want to operate as a corporation, they must incorporate as a Professional Corporation. Other types of organizations that want to incorporate may qualify to incorporate as Nonprofit Corporations.

While federal tax law determines how various types of corporations are taxed, it is the various States’ laws that authorize the formation of businesses as corporations in the first place. These laws specify what types of businesses may be formed as certain types of corporations. Generally, a corporation may be formed to operate any lawful business. However professions that carry a risk of professional liability are required to incorporate as Professional Corporations. Doctors, medical professionals, lawyers, and accountants are some examples of professionals who would need to incorporate as Professional Corporations. The exact professions will vary from state to state.

Professional Corporations

Incorporating allows these professionals to limit their personal liability for business debts and for the malpractice liability of their business partners. For example, if two lawyers practice together in a partnership, each could end up paying for any malpractice damages awarded against the other. However, if they operate their business as a professional corporation, the lawyer who does not commit malpractice will NOT be personally liable for the malpractice of the other lawyer. However, the professional corporation law requires that the business carry adequate malpractice insurance. Both lawyers will also be protected from personal liability for the actions of employees, as well as for other business debts.

Non-Profit Corporations

Another alternative form of incorporation is a Nonprofit Corporation. Different state laws will apply to forming a nonprofit corporation as well. Generally businesses that have a religious, charitable, literary, scientific or educational purpose may form as nonprofit corporations. A nonprofit corporation will usually try to qualify as a tax-exempt corporation under the Internal Revenue Code as well. This means that the corporation will not have to pay federal income tax on profits. Act carefully when considering whether to incorporate as a nonprofit business: once you incorporate as a nonprofit corporation, you will no longer own the business. A nonprofit corporation does not have shareholders. Its profits are to be used only to support its religious, charitable, literary, scientific or educational mission. This does include paying its employees a reasonable salary.

Because each type of corporation has different requirements regarding how the corporation is formed and how it must be operated, you should check with one of our attorneys who practices in the area of corporate law when considering if one of these alternative forms of corporation is right for your business.

Limited Liability Company (LLC)

Each state’s laws spell out the requirements for operating a business as a limited liability company. The basic structure of an LLC is that it combines the management aspects of a partnership with the liability advantage of a corporation. This makes it a very desirable structure for a business. However, like a corporation, there are legal requirements that must be met in order to preserve the status of the business as an LLC. Special care is also required in establishing the LLC to make sure the desired tax status is obtained. You should consult an attorney who practices business law to establish your limited liability company.

What is a Limited Liability Company (LLC) and is it a better form for your business than a corporation?

LLCs generally have all the benefits of a corporation when it comes to limiting the business owner’s liability. The advantage of an LLC is the management flexibility it allows, and the potential tax benefits. LLCs allow a business to have the limited personal liability of a corporation as provided by state law, while being treated as a partnership for purposes of Federal tax laws. The downside to an LLC is that you don’t get the free transferability of ownership, perpetual existence, and the ability to be totally owned by a single individual that you’d get with a Corporation. That is the trade off you make to get the Partnership tax status and greater management flexibility.

If the company’s business plan includes raising capital by someday admitting new owners or going public, then a Corporation is probably the more desirable form for the business. Limited Liability Companies generally restrict the transfer of ownership interests in the business to make sure the business is classified as a Partnership under federal tax law. An LLC usually has a limited existence in that it will end after a specified number of years or upon the occurrence of some specified event. This requirement is intended to help the business qualify as a Partnership for purposes of tax law.

Being taxed as a Partnership makes the LLC structure particularly attractive because it gives the owners a great deal of flexibility in allocating profit and loss. Operating as a Limited Liability Company also gives the owners greater flexibility in determining who manages the business and what each owner’s particular duties are in that regard.

Determining whether any particular business would benefit from being structured as a Corporation or a Limited Liability Company is a complex decision. Our team of experienced Business Law and Corporate Attorneys who practice business law can help you determine what the possible consequences of each structure and which business incorporated options would be best for your business.

Experienced Sacramento Business Incorporated Lawyers

We are experienced Sacramento Business Law Lawyers. We have helped many individuals and companies with their business planning and incorporation needs.  Our business lawyers offer affordable business formation and business incorporation packages and great advice and strategy regarding business law, asset protection, buying or selling a business, business disputes, contract drafting, and annual corporate requirements.  Our business law lawyers can help you protect your personal assets and give you the great legal advice and strategy needed to get you the results you want.  Contact us today to schedule your complimentary attorney consultation by clicking HERE or by calling 916-757-6000. We look forward to helping you with all of your Sacramento business law needs.



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