Business Entity Selection

An important consideration for your business is the choice of an appropriate legal business entity. As a business owner you must be aware of the various business organization structures, their characteristics, and the laws that govern their management and formation. Some of your choices include C corporations, S corporations, General Partnerships, Limited Partnerships; Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), and Sole Proprietorships. Making a proper selection is a critical decision that can provide tax advantages as well as legal protection for your assets.

Each type of business entity has its advantages and disadvantages. One Issue to be considered is taxes. The proper business entity type can minimize self-employment and income taxes. Your understanding of the complete tax situation including income tax, payroll tax, and estate tax exposure-is key in determining your choice of business entity.

Sole Proprietorships are created when an individual owner begins to conduct business. You as the owner owns all of the business assets and have unlimited personal responsibility for liabilities of the business. This form of business, although extremely common among business owners with little legal planning experience, provides no intrinsic legal protection for your personal assets, and is rarely recommended for business owners. You are personally and individually responsible for the taxes on all income from the business at the applicable tax rates. If your business is owned by more than just yourself, it cannot be run as a Sole Proprietorship.

If two or more persons operate as co-owners of a business or profit then a General Partnership is formed. Each general partner operates in the management of the business, owns the assets, and shares in the profits and losses. As a general partner each is personally liable for the obligations of the business. As a general partner you are taxed on your individual tax returns. Often there will be a partnership agreement that sets forth specific agreements between the partners. Unfortunately, if one partner brings a liability or a lawsuit to the business, it can impact all of the assets of the business as well as all of the assets of each partner. As such, like the Sole Proprietorship [above] it offers little legal protection and is not often recommended.

Personal liability protection is important when choosing the appropriate business entity. If you operate as a Sole Proprietorship, Proprietorship or General Partnership, there is no owner liability limitation. Limited Partnerships, LLCs, LLPs, and S Corporations and C Corporations do afford liability protection for its owners.

If you are a sole business owner, the single-member LLC is a popular liability-limiting alternative to a proprietorship. When all owners perform management duties, a limited partnership is not a viable option because this would jeopardize their status as limited partners.

A Limited Partnership differs from a General Partnership in that there is at least one limited partner who contributes capital and shares in profits, but does not have substantial management control. In this case, the limited partner has liability only to the extent of his or her capital involvement.

Other business entity types do offer management by multiple individuals without limitations. Capitalization of the business through outside sources may also be an objective. When issuing ownership interests, it is important to identify preferences regarding voting versus nonvoting status of investors as well as the method of return desired by the investors-equity growth or current income distributions.

Often, a change in business entity status is sought to accomplish a change of ownership. The objective my involve transferring ownership to a successor by way of gifts, an installment sale, a stock redemption, a bequest, or a combination of these methods. It may be necessary to use a different form of business entity to meet these objectives.

Every business entity selection situation is unique. We will systematically match the various entities' benefits with your objectives to help you make the best choice. We will become familiar with all aspects of your business and address your major tax and non tax issues, and consider all your possible alternatives.

A Limited Liability Company (LLC) combines elements of Partnerships and LLCs and must file articles with the state. In a Limited Partnership, the owners are known as members, and they only risk losing money that has been invested into the LLC. Usually, only the LLC assets are used to pay its debts. But, an LLC is not a separate taxable business entity and LLC owners must report profits and losses on their individual tax returns as if they were in a Partnership.

A corporation is a separate legal and taxable business entity. One must comply with statutory formalities to set up a corporation. Except under certain circumstances, the owners of the corporation are personally protected from the corporation's liabilities.

Your business' contracts with its vendors, customers, and employees, form the legal framework on which your company is constructed. Contractual agreements are at the heart of most business interactions. A contract may specify the products or services you will provide, under what conditions, and for how much compensation. A well-written contract will help you avoid law suits, maximize your financial return, and protect your intellectual property.

After completing a careful analysis of your business, The Law Offices of Keith McManus, LLC. will advise you which form of business entity is the best choice for your company.

The Law Offices of Keith McManus, LLC. have conducted numerous seminars throughout
New England and taught several law classes in the area.

The Law Offices of Keith McManus, LLC. practice in the areas of Business Entity selection
Wills, Trusts and Estate Planning, Title Insurance Services, and Residential
and Commercial Real Estate Law.