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Entity Formation and Business Planning

The decision about what business entity to select for a new venture has critical implications for liability and tax consequences for the stakeholders of the entity.  There are different rules and regulations that apply to each business form, but here are four of the most common:

  • Sole Proprietorships – The most basic of the business entities, this is appropriate if the owner and manager of the business are the same person. Any income generated by this business is claimed as personal income, rather than requiring the filing of a business return.  This also means that any risks and liabilities fall on the individual instead of a business entity.  Sole proprietors are bound by any applicable licensing laws and also must abide by employment laws if they hire any employees;
  • Limited Partnerships – There are at least one general and one limited partner under this entity structure.  There are benefits to the limited partners as long as they do not participate in the direct operation of the business.  One of the greatest benefits is the limitation of liability.  General partners are responsible for the running of the business and share liability for business debts and obligations;
  • Corporations – In deciding to form a corporation, whether a “C” or “S” type, it involves the creation of an entirely new legal entity, once all the formalities have been completed.  There are very specific requirements for the formation and operation of a corporation, but the entity is responsible for its own obligations, thereby providing a legal shield for the officer, directors, and owners of the corporation.  It is important to recognize that the legal benefits also come with tax consequences and restrictions on the actions that may be carried out under the corporate structure.
  • Limited Liability Companies – Commonly known as “LLC,” this type of entity combines characteristics of both Partnerships and Corporations. It enjoys the flexibility of a Partnership while its members have limited liability usually afforded to shareholders of a Corporation. Due to its mixed features, a LLC can choose to be taxed as a Partnership or as a Corporation. In order to determine which tax method to use, it is important to analyze the goals of the company and of its members.

The reality is that there are many different types of business entities that may be formed based on the goals and needs of the individuals embarking on the new venture.  It is important to discuss the plan for the business with an experienced corporate attorney in order to select the form that will be most effective. At Brunoro Law, we offer a one-hour free consultation so that we can outline a potential strategy for you and your new bus