In the rush to embark on a new entrepreneurial adventure, people often overlook the importance of taking the time to choose the right entity to structure their business. Choosing the right entity has both tax and non-tax implications that require every business owner to engage in proper planning and consult with tax and legal professionals.
Before ordering inventory, hiring employees, or printing some fancy business cards, every business owner should reflect on these issues:
1. How will the business be managed?
2. How will ownership be transferred?
3. Does the ownership structure need to maintain flexibility?
4. What happens if the owner dies, retires, or files for bankruptcy?
5. How will the owner be compensated?
6. What are the tax consequences for owners who invest capital in the business?
7. To what extent is the owner liable for the debts and the conduct of the business?
8. How will the profits be taxed?
9. What types of benefits will be provided to employees?
One form of entity that has gained significant popularity is the limited liability company-also known as the “LLC”. An LLC is formed by submitting a Certificate of Organization to the Department of State and can only have one “member” (owner). Some of the main characteristics of an LLC include:
– very flexible structure;
-taxable as a partnership
– LLC members are not responsible for LLC debts and obligations
– less formalities than a company
-no annual fee for members
-operation agreement controls the relationship of the members
Whether you choose an LLC, corporation, LP, or other business entity is an important consideration that should be properly addressed before starting your new business. Be sure to meet with an accountant and attorney, experienced in business formation, to review which entity will best help you achieve your business goals.