Selecting the right business form for an organization requires a solid understanding of the needs and desires of the company and its owners. It is imperative to have a clear vision of where you want to go and how you intend to get there before forming your business. Referring to your business plan is the best place to start because it sets out the goals of the founders and provides a framework within which the business will operate. Yet your business plan should also be a living, breathing document. It should evolve as your business evolves, as obstacles appear, as new opportunities present themselves.
While certain business goals mandate a particular type of business entity, often more than one entity type may be appropriate to achieve an organization’s goals. The type of entity you choose for your company should be thought of as an instrument to get your business where you ultimately want it to go with greatest ease. Not a limitation.
What exactly is a business “entity,” you ask? It is the particular business form your company adopts. The most common types are sole proprietorships, general partnerships, limited partnerships, Corporations (S Corps and C-Corps) and limited liability companies (LLCs). Each has unique characteristics with important tax and operational consequences.
We’ll be going deeper into the essential qualities of each entity in later posts, but for the time, business owners should consider the following goals they wish to achieve when forming their new business: the degree of control, limited liability, avoidance of double taxation, definite terms of existence, difficulty of participants to bind the entity, a proportionate allocation of profits and losses, and under which state the company be organized.
Typically, the greatest control is found in sole proprietorships, single member LLCs, and general partners in a limited partnership.
Corporations, LLCs, and limited partners in a limited partnership enjoy limited liability—i.e., the owners are shielded personally from the conduct of the business.
In general, any entity can avoid double taxation aside from a C-Corp. General or limited partnerships and LLCs can, if desired, exist only for a definite term, rather than indefinitely.
Difficulty to Bind
It is more difficult for participants in a corporation or limited partnership to bind the business, in relation to the other business forms.
Proportionate Allocation of Profit and Loss
The allocation of profits and losses is proportionate amongst members in an LLC (unless an alternative arrangement is agreed to).
Selection of a State of Organization
Delaware has long been the favorite state for companies to organize their company. The law is much more clearly defined in Delaware simply because there are so many more corporate disputes to be decided. This makes the courts in Delaware much more sophisticated in corporate law matters. Furthermore, if the business is likely to go public, most underwriting firms will insist on a Delaware corporation because it is more acceptable in the public markets.
As we move forward with out blog series, we’ll be addressing each entity type in greater detail and going over some of the most important tax and non-tax considerations for business owners. We’ll also offer common real world examples to help put some of these, rather esoteric, concepts into everyday terms.
The Atlanta Lawyer