Business owners face many decisions when starting their own companies – what’s the best way to structure my business? What kind of entity should I form? These questions can be difficult to answer on your own. In this article by guest author Linda Melancon, a practicing Louisiana attorney, we break it all down so that you can confidently make an informed decision about which type of company best suits your needs.
Starting a Business
Sometimes it is caused by getting laid off from your current job; sometimes it stems from a belief that you can provide a product or service that no one else can; but almost always, it is brought about by a strong desire to be your own boss. However, before you jump off into the world of the self-employed, there are many things that you should know. This article will give you some information on the different types of legal structures that your business may take, but you should always consult with professionals knowledgeable about law, accounting, insurance, and finance before you take the plunge.
Major Types of Business Structure
There are generally four major kinds of businesses recognized in Louisiana: sole proprietorships, partnerships, corporations, and limited liability companies. A sole proprietorship is a one-person business that is not registered with the state as a corporation or a limited liability company (LLC).
1. Sole Proprietorship
Sole proprietorships are so simple to set up and maintain that you may already have one without even knowing it! For instance, if you are a writer who is paid to contribute to a paper, a photographer who does freelance work, or even an independent contractor who is not on an employer’s regular payroll, you may be a sole proprietor. With a sole proprietorship, all of your income and expenses are claimed on your individual tax return. While this may sound great, the downside is that you may be held personally liable for any debts that your company owes and be personally liable for any negligent acts committed by your employees. This means that if your business doesn’t pay a supplier, defaults on a debt, or loses a lawsuit, the creditor may legally come after your house or other possessions.
A partnership, by definition, means that more than one person is involved in your business’ formation. Partnerships are a separate legal entity, so they are taxed differently than sole proprietorships, and they must file their income taxes accordingly. There are two main kinds of partnerships – a general partnership and a limited partnership. In a general partnership, all of the partners share in the liability, or incurred debts, but they also share in the profits. This means that all voices have equal say. In the limited partnership, one or more of the partners may not be responsible for the debts. That means one of the partners is responsible, so generally people in a limited partnership have different voting rights depending on their responsibility in the business. Like with sole proprietorships, you may subject you to personal liability.
Corporations are another form of business entity. The corporation is a separate legal personality, which gives several advantages. First, because it is a separate legal entity, it has many rights that any citizen has. This means a corporation can enter into contracts, buy and sell property, sue and be sued, and can even be responsible for crimes. This also means that corporations may be taxed separately. Corporations are classed by the IRS as either an “S” corporation or a “C” corporation. “S” corporations don’t usually pay income tax at the corporate level. They distribute their profits and losses to their shareholders, who then pay taxes on the dividends they receive. “S” corporations must typically have no more than 100 shareholders. “C” corporations are subject to income tax at the corporate level and then again when the profits are distributed to the shareholders. However, “C” corporations don’t have a limit on the number of shareholders they may have.
Another benefit of forming a corporation is that any losses suffered by the corporation may not directly affect its shareholders, so people are more prone to invest in a corporation. If running a corporation, you are responsible for informing your shareholders through meetings, maintaining corporate records for them to review, and documenting the major decisions made by your company. This is called following corporate “formalities.” If this is not done, your corporation could lose its corporate status. If that happens, those in charge may be held personally responsible for the corporation’s debts.
4. Limited Liability Company (LLC)
A limited liability company is commonly referred to as an “LLC.” An LLC is similar to a corporation, but is often a more flexible form of ownership. This type of business provides protection for the business owner like a corporation does. Members are the owners of an LLC, so management is usually proportional to the amount of money invested in the company. Although, an LLC can designate one member (or a third party) to manage the company. With an LLC, there is no limit on the number of stockholders (like with a “C” corporation), and in most circumstances, you are protected from personal liability for your business debts. LLCs also offer a lot of flexibility regarding taxation. LLCs can be taxed as a disregarded entity like a sole proprietorship, a partnership, an “S” corporation, or a “C” corporation. You should consult with a CPA about the best way to structure your business for tax purposes. Limited liability companies do not have as many “formalities” required by law, so it may be easier to ensure your business creditors cannot access your personal assets.
Overall, what type of business entity you choose depends on many factors. Knowing how many people will be starting the business with you and what benefits you want to have will greatly narrow your choices. Regardless, such a decision should not be made alone; a skilled attorney in your jurisdiction with both knowledge and experience in the formation of businesses should be consulted to make sure that whatever your business, it begins with all of the protections you will need. It’s always much easier to start correctly than to go back and fix errors later.
We hope you found this blog post helpful in understanding the types of business structures. If so, we encourage you to share it with your colleagues and friends who may be looking for guidance on how to set up their own businesses.
The information provided is not intended to be legal advice and does not constitute any attorney/client relationship. You should consult with an attorney for individual advice regarding your own situation.
Linda Melancon is the owner and managing attorney for Legacy Estate & Elder Law of Louisiana, LLC, a law firm that focuses on Estate Planning, Elder Law, Life Care Planning, Medicaid and VA benefits planning, Special Needs Planning, and Estate Administration (Successions and Trust Administration). She is a member of the Louisiana Elder Law Task Force, the Academy of Special Needs Planners and ElderCounsel. Linda is a Board Certified Estate Planning and Administration Specialist, certified by the Louisiana Board of Legal Specialization. She is also accredited by the Veterans Administration to give advice regarding veterans’ benefits. When she’s not working, Linda enjoys bike riding in City Park and gardening.
For more information on estate planning and administration, follow Linda Melancon on Facebook, Twitter, and LinkedIn. Have any questions about business estate planning and protection, email her through this clickable link.