Guide to Selecting the Right Entity for Your Business

Selecting the wrong type of entity for a business may have serious consequences. The type of entity you form effects your personal liability, tax treatment and benefits, as well as your ability to sell your interest in the business. As a LegalShield small business plan member, you have access to attorneys who can help you make an informed decision. Here is some basic information on the various types of business entities. If you have questions, call your LegalShield provider law firm today.
  1. Sole proprietorships are unincorporated businesses owned by one person typically not registered with the state. Sole proprietorships put your home, personal savings and other assets at risk in the event your business is sued or cannot repay a debt. Some state and local governments require certain types of businesses to apply for licensing or registration even if they are operated as a sole proprietorship. Make sure you understand the laws that govern your industry.
  2. Partnerships expose you to even greater liability than sole proprietorships. In a general partnership you are also responsible for certain actions of your partner(s). Partnerships may require state registration. Partnerships must also file yearly returns with the IRS to report losses, profits and deductions. Before conducting business, partners should draft an agreement outlining how profits, expenses and workload will be divided. Disputes between partners can become costly to resolve and damaging to the business. Setting terms early on will help minimize the risk of a dispute. If you need assistance with the review or a partnership agreement contact your LegalShield provider law firm.
  3. Corporations, sometimes referred to as C corporations, are independent entities formed and owned by one or more shareholder. Corporations may raise capital by selling stock or rely upon capital contributions of its shareholders. Shareholders’ personal assets are protected from legal liability, including business debts and lawsuits. The corporation pays taxes, conducts business and distributes profits to shareholders. Starting and maintaining a corporation requires a great deal of time and paperwork. It is important to keep thorough corporate records and ensure your corporation is fully compliant. In some instances, corporations may be taxed both on profits and on dividends paid out to shareholders. It is vital to consult an accountant or tax attorney regarding your corporate taxes.
  4. S-Corporations are corporations for which shareholders have made the S-Corporation election with the IRS. S-Corporation status avoids the double taxation of C-Corporations by having shareholders taxed personally. There are certain requirements a corporation must meet to be able to qualify under subchapter S. The corporation may not:
    • Be a foreign corporation;
    • Exceed 100 share holders;
    • Have more than one class of stock;
    • Have shareholders who are non-resident aliens, corporations, partnerships or certain types of trusts and estates;
    • Be an ineligible business class, which includes insurance companies, certain types of financial institutions and domestic sales corporations working internationally.
  5. Limited Liability Companies (LLC) offer protection to their members similar to that of a corporation. As the member of an LLC your personal assets are protected from the LLC’s liabilities. The liability protection is limited and does not protect members from illegal or wrongful acts, even if an employee committed that act. LLCs require less record keeping than corporations. It is up to the members of the LLC to determine how profits are distributed. There are fewer restrictions on the distribution of profits than with a corporation.
Regulations and requirements for your business may vary based on type of industry, as well as state and local laws. No matter what type of entity you choose it is important to seek the advice of an attorney. Contact your LegalShield provider law firm if you have any questions.