Making the decision on what type of legal entity to operate under as a new (or even existing) business is much more difficult if you don’t understand the legal and tax ramifications of each potential choice. Here are some key considerations you should be making as you examine your options:
Tax treatment. Business entities differ in how taxes are assessed and paid. For example, limited liability companies (LLCs) are “pass through” entities where the business owners report profits and losses on their personal tax returns. C Corporations are subject to “double taxation,” where both the corporation and the shareholders are taxed. S corporations are not subject to federal income tax; shareholders pay taxes based on their allocated share of the corporation’s income.
Ease of incorporation. All entities except sole proprietorships are required to register with their state’s Secretary of State and to adhere to certain formal recordkeeping rules in order to safeguard their limited liability protection.
Limited liability protection. Protecting personal assets from potential business liabilities is the primary reason business owners may choose to incorporate as a C Corp or S Corp, or form an LLC. This type of asset protection is not available to companies that operate as sole proprietorships or partnerships, making owners of these entities personally liable for any business judgments.
Ownership transfer. Adding new shareholders and transferring ownership shares in a C Corp or S Corp is fairly simple. However, sole proprietorships have to be sold and partnerships dissolved before an ownership transfer can occur.
Owner/Manager separation. Owners in corporations, LLCs or limited partnerships are considered to be separate from management. For sole proprietorships and general partnerships, owners are not separate from management and can be held legally responsible for undesirable consequences that may occur due to management decisions.
Raising capital. Some investors may steer clear of investing in LLCs because these companies are taxed as “pass through” entities and it can complicate an investor’s personal taxes. C Corps provide the greatest flexibility when it comes to raising capital; S Corps have some flexibility, but have a shareholder limit of 100.
Johnson Legal PC offers effective valued solutions along with exceptional legal expertise and creative thinking for New Jersey and New York businesses. Contact us to learn more about how a great corporate attorney can help your business thrive.
