Choosing the Right Business Entity
It is the start of a new year and that often means that people are taking action to start the business that they have been dreaming of. One of the first steps that a business owner should take, is to make sure that they select the correct business entity. There are various business entity options. This post will briefly summarize the following business entities: sole proprietorships, general partnerships, limited liability companies, and corporations.
Sole proprietorships are the most simple form of the available business entities, and also the most common. This refers to a business that is owned by one person. It is possible that someone could be operating a sole proprietorship without even knowing it because there are no legal formalities required. The distinguishable characteristics of a sole proprietorship are that the owner has the sole decision making power and is personally reasonable for one-hundred percent of the risks and liabilities associated with the business. For this type of entity, it is imperative that the owner get insurance. A sole proprietorship ends when the owner dies. Also, there are no variations in tax treatment, meaning, the owner is taxed under their personal income.
A general partnership is formed when more than one person involve themselves in business with another individual. The general partnership may be formed without legal formalities required. It is defined as an association of two or more people to carry on as co-owners a business for profit, whether or not the person intended to form a partnership. See RUPA §202(a). The co-owners must have both management rights and money interest, and the intent to carry on as a co-owner the business for profit. Generally speaking, as for taxes, the individual partners’ profit and losses will be part of their own personal income tax obligation. Also, each partner of the general partnership would be personally liability for the debts of the business.
There are other types of partnerships as well, such as, Limited Partnerships (LP), Limited Liability Partnerships (LLPs), and Limited Liability Limited Partnerships (LLLPs). Kansas does allow LLLPs.
Limited Liability Companies (LLCs)
Likely the most popular business entity option is the Limited Liability Company (“LLC”). An LLC is a type of business organization that is formed by state statute. Wyoming was the first state to allow LLCs, and other states adopted the LLC soon thereafter.
LLCs are a popular business organization choice because they are the most flexible of the available business organizations. They can be modified almost anyway that the member of the LLC would like, and also have limited liability.
LLCs have what is called a “liability shield.” This means that the debts, obligations, and liabilities of an LLC are only considered the debts, obligations and liabilities of the LLC itself, and not the debts, obligations, and liabilities of the member of the LLC. See DLLCA §18-303. However, if a member or manager of the LLC would like to be obligated personally for a debt, obligation, or liability, they may do so by a guarantee. This occurs most often in the context of a small business if they need to secure a loan or do not have good credit history.
Lastly, corporations are another well-known business organization. Of the available business entities, corporations are the most complex. Corporations are a legal entity where the owners maintain control through shares that they own in the company. The owners comprise of shareholders, directors, and officers. Businesses often choose to have a corporation when the owners want to limit liability, have free transferability of interests, want a large number of owners, and want the company to continue to exist despite withdrawal or death of the owners. There are both public and private corporations to choose from.
Making the Final Choice
Selecting the business entity for your business is not a decision that should be made lightly. You should be considering the current and future needs of your business, legal liability, tax implications, and the costs of conducting business through the selected entity. If you are looking to start a business and have questions regarding formation, we highly recommend that you contact an attorney.
The information throughout this webpage is for informational purposes only and is not legal advice. Legal advice must always be customized to the individual case. Further, the information on this webpage does not create any attorney-client relationship between you and the Gilchrist & Fields Law Firm.