Creating A Business Entity
The use of an entity to own and operate a business will provide the owners with a great deal of personal liability protection. The term entity refers to a corporation, limited liability company, limited partnership and so forth. There are many decisions to make while forming an entity, but the process should not be especially difficult, and with input from your lawyer and your accountant (for tax purposes), most of the issues can be resolved early on.
Although liability protection is usually the principal reason to form an entity, other benefits include:
- Using an S corporation to avoid a double income tax on certain events
- Presentation of the business as an entity creating more confidence and trust than as a sole proprietorship
- Leasing of real estate or equipment between the owners and the entity
- Preservation of the structure during ownership transition (i.e., the entity does not die); standardized ownership and corporate administration
- Using a C corporation to make use of a medical reimbursement plan for a small or family-operated business
Common Formation Problems
- How do you decide between using a corporation or limited liability entity or even another type of entity?
- Could any of your employees do anything that might result in some liability, including activity that is not directly associated with your business, but for which you might be liable?
- What’s the difference between a so-called S corporation and a regular one (i.e., a C corporation)?
- What is the so-called Gross Receipts Tax for limited liability companies, and will you be subject to it?
- How long will it take to have your articles filed with and returned by the Secretary of State?
- Will the cost to form be a fixed fee?
- If you are forming the entity with two or more owners, should you prepare an owner’s agreement to address what happens if one of the owners dies or wants to be bought out?
- What other costs are involved such as tax returns, minutes, government filings, etc.?
- If you want to use your business name for the entity name, or if you will file for a fictitious name, do you have protection for your name as a trademark or service mark?
- Are your personal assets so minimal that you do not really need to use an entity?
- Can you use insurance to substitute for the liability protection that an entity can provide?