With nearly half a million new businesses starting every month in the United States, it would seem that starting a business has never been easier.? Not so fast.
While it is true that almost anyone can, literally overnight, start a business or work from their own virtual office, and that for many folks, development of a business concept is easy enough, far too few of us take the time to consider the appropriate legal structure for either the venture or the personal interests of the business owner.? When establishing a business, it is critical not just to give birth to the idea but to create an entity that will allow the idea to grow and thrive while protecting the business owner from unnecessary risk and hopefully allowing them to benefit from opportunities where practicable.
What follows is a basic overview of entity types.? It is important to realize, however, that each business formation has special taxing considerations that are not addressed here that may factor in to which form is best suited to one?s particular needs.
Sole Proprietorship ? The easiest, simplest, and most common entity to form, this option is open to everyone who wants to start a business.? In fact, you may already have one without even knowing it, if, for example, you do freelance or contract work. The business is not taxed, only the sole proprietor.? This type of entity provides no separate liability protection for the owner.
Partnership ? At its most basic, it is simply an association between two or more persons in business for profit. ?While highly recommended, no formal agreement is required to create a general partnership and it is the default structure when two or more parties are in business together.? Typically, each partner has equal authority and management power and, on the flip side, joint and several liability for all obligations of the partnership and the other partner(s).
Limited Partnership ? An association between two or more persons in business for profit where at least one partner is a general partner and at least one is a limited partner. ?This entity requires a formal filing of its status.? Limited partners enjoy protection from the liabilities of the partnership.
Limited Liability Partnership ? Requires formal registration and allows for limited protection for general partners in a general partnership for certain liabilities of the partnership which may arise in the course of business. ?A written partnership agreement is a must to deal with the complexities of this organization.
Limited Liability Limited Partnership ? Only recognized in a few states, Colorado being one, this entity requires a formal registration and provides limited liability for general partners in a limited partnership for certain liabilities of the partnership which may arise in the course of business. ?Again, due to the intricacies of the liabilities and management roles of different levels of partners, a written partnership agreement is a must to deal with the complexities of this organization.
Limited Liability Company ? The most popular newly formed entity, this business provides the liability protection of a corporation and the flexibility for the owners to operate as a partnership.? It allows the most flexibility for both taxation and entity management and is the recommended choice for most new small businesses.
C Corporation ? Used primarily for larger entities and the form chosen by all publicly traded organizations.? There are no restrictions on the number of owners and it provides liability protection. ?Corporations require a formal filing and have a separate board of directors for management.? These entities are perpetual.
S Corporation ? Requires a formal filing and a separate taxing election with the IRS.? This entity provides all the liability protection of a corporation without the double taxation.
SMART TIP: It is important to realize that there is no one-size-fits-all approach to which organizational structure is right for you or your business.? What is right for one person or business idea may not be best for another person or business idea.? Different structures offer different benefits and risks.? We always encourage consultation before selection.? At the AR Group, we have the extensive experience necessary to help provide guidance on entity selection and drafting all the documents necessary to help your business, in any form, run smoothly. Please contact us at Vanessa@theARgroup.com or 720-452-3300.