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 partnerships and so forth. There are many decisions to make in forming an entity, but the process should not be especially difficult, and with input from me 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; and using a C corporation to make use of a medical reimbursement plan for a small or family-operated business. Some of the important issues to consider before you form an entity are:
How do I decide between using a corporation or limited liability entity or even another type of entity?
Could any of my employees do anything that might result in some liability, including activity that is not directly associated with my business, but for which I might be liable?
What’s the difference between a so-called S corporation and regular one (i.e., C corporation)?
What is the so-called gross receipts tax for limited liability companies, and will I be subject to it?
How long will it take to have my articles filed with and returned by the Secretary of State?
Will the cost to form be a fixed fee?
If I am forming the entity with two or more owners, should we prepare an owner’s agreement to address what happens if one of us dies or wants to be bought out?
What other costs are involved such as tax returns, minutes, government filings, etc.?
If I use my business name for the entity name? If I file for a fictitious name, do I have protection for my name as a trademark or service mark?
Are my personal assets so minimal that I do not really need to use an entity?
Can I use insurance to substitute for the liability protection that an entity can provide?