Staff Writer, @DooleyNotedLaw
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A commonly asked question among budding entrepreneurs is if they should form a Limited Liability Company (LLC). Starting an LLC is a popular route to take when choosing a business formation entity. However, it’s not the only choice, and it may not be the absolute best choice for you and your business. Ultimately, there are many options. Therefore, it’s all about finding the right one for you.
It’s essential to understand the different types of business entities to discern if forming an LLC is right for you. Additionally, you should know the pros and cons associated with each.
This is the simplest business structure. The business is owned and run by one person without distinction between the business and the individual. You can choose to run a sole proprietorship under a trade name or DBA (doing business as) name.
PROS: Sole proprietorships are easy and inexpensive to create. Further, the owner has complete control over the business, and it has the lowest tax rates of all business forms.
CONS: The owner is personally liable for any debts or obligations. Additionally, it is usually challenging to raise capital, and the business literally dies with you.
A partnership is similar to a sole proprietorship; however, the ownership is divided between two or more people. They each contribute financial resources, property, labor, and skill. Moreover, they share all of the losses and profits of the business venture.
PROS: Partnerships are inexpensive and straightforward to form. There is an ease of capital acquisition due to shared financial commitment, and each partner contributes a unique skill set.
CONS: As a partner, you are not only liable for your actions, debts, and obligations of the business but also for the other partners. Personal disagreements can also occur between partners. Also, the profit and success are shared between the partners, even if some aren’t pulling their weight.
The IRS will designate some corporations as S-Corps to avoid double taxation (once to the Corporation and the shareholders).
PROS: One advantage of the S Corporation is that it receives pass-through taxation like the LLC.
CONS: S-Corps have more operating requirements and ownership restrictions than an LLC.
A C corporation or C-Corp is often called a generic corporation. It is the oldest and one of the most common business entities. Additionally, a C corporation is an entirely separate legal entity from its owners. It is also taxed separately. Ultimately, the business is legally liable for actions and debts rather than the shareholders.
PROS: All business entities can provide fringe benefits to their owners and/or employees. However, the C-Corp allows for a more excellent range of fringe benefits. Forming a C-Corp is also beneficial to corporate tax treatment and income splitting. Additionally, the tax rate on corporate income is usually lower than the tax rate on personal income up to the first $75,000 in revenue.
CONS: C corps will have a board of directors. This means the business owner will have less control. Moreover, every major decision will have to be passed by the board.
A Nonprofit’s principal purpose is the public benefit. In other words, nonprofit owners dedicate their work to giving back in some way.
PROS: Nonprofits are eligible for tax breaks. Furthermore, nonprofits are exempt from federal, sales, and property taxes if classified correctly by the IRS.
CONS: Due to regulations to maintain the nonprofit status, this entity type limits personal control. Additionally, the public can inspect the finances of a nonprofit. This can be detrimental to the image and credibility of the nonprofit.
The LLC or Limited Liability Company is the newest form of business incorporation. An LLC is almost like the combination of a corporation and a partnership. Over 80 percent of small businesses incorporate their businesses as LLCs.
PROS: This simple business structure protects personal assets. LLCs provide business owners with limited liability protection with more minor requirements. Further, LLCs have more flexible ownership options than the other entities. This means that the LLC typically owns the company assets. Additionally, the assets are separate from the LLC owners’ personal assets.
CONS: LLCs run into challenges when it comes to securing investors. Usually, investors may be more comfortable investing in more widely understood and recognized corporate formations.
An LLC is an excellent option for those who want to minimize risk when starting their business. Moreover, entrepreneurs have more management flexibility and less complex tax filings. If you happen to go into debt, an LLC protects your personal assets. Additionally, your assets won’t pay for outstanding business expenses.
Your net income or loss is “passed through” to the personal income of the owner or member. It is taxed as personal income for state tax returns and federally taxed as a partnership (in the case of a multi-member LLC) or as a sole proprietor (in the case of a single-member LLC).
Often new entrepreneurs think that starting an LLC is a must. However, while this is the simplest way to structure your business, it may not be the best for your business. If your key concern is personal liability for business issues, you can get business insurance. Depending on where you live, it could be cheaper than filing LLC paperwork.
Therefore, take time to consider how prone to lawsuits your industry is. Also, please take a look at your key competitors to see how they’ve structured their business.
You have lots of options. While some entities are less common among entrepreneurs, they may offer certain tax benefits/breaks for profitable businesses.
Keep in mind that starting an LLC does not have to be done in the first year. You can continually re-evaluate as your personal or business situation changes. Similarly, it’s not uncommon to operate as a sole proprietor for the first couple of years. After, they may adopt a business structure for tax planning reasons once profits are noteworthy.
If you’re starting a business in Texas, you should work with a business lawyer to ensure everything is in order. A business lawyer can help you form an LLC or other entity and provide advice on contracts and intellectual property.
Dooley Noted will help ensure that your business is off to a strong start. We can help you draft contracts, register your business with the state, and protect your intellectual property. Having a business lawyer in Texas on your side can help reduce the risk of legal problems down the road.
Contact Dooley Noted today if you’re ready to start your LLC.
The contents of this post, and the posting and viewing of the information on this post, should not be construed as, and should not be relied upon for, legal advice in any particular circumstance or fact situation. An attorney should be contacted for advice on specific legal issues.
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