Selecting the Appropriate Entity for Your Business

This article was originally published in Hershey Advisors’ monthly Tax and Busipage2ness Alert.

A principal consideration for any business, whether new or existing, is choosing an appropriate legal entity. Available options in most states include C corporations, S corporations, general and limited partnerships, limited liability companies (LLCs), limited liability partnerships (LLPs), and sole proprietorships.

Each type of entity has various advantages and disadvantages. One issue to consider is tax savings. The proper entity can minimize self-employment and income taxes. Understanding the total tax situation, including income tax, payroll tax, and estate tax exposure is essential in determining the choice of entity.

Personal liability protection is often an owner’s main objective in choosing the appropriate entity. Operating as a proprietorship or general partnership offers no owner liability limitation. Limited partnerships, LLCs, LLPs, S corporations, and C corporations provide varying degrees of liability protection for the owners depending on state law. For sole owners, the single-member LLC is a popular liability-limiting alternative to a proprietorship.

If a business is owned by more than one individual, it cannot be run as a proprietorship. If all owners provide management services, a limited partnership is not a viable option because that would jeopardize their status as limited partners. Limited partnerships, LLPs, LLCs, C corporations, and S corporations allow for management by multiple individuals without limitations.

In many cases, a change in entity status is sought to accomplish a transition in ownership. Whether the objective involves moving ownership to a successor via gifts, an installment sale, a stock redemption, a bequest, or a combination of methods, it is often necessary to use a different form of entity to meet these objectives.

Each entity selection situation is unique. The business owner’s objectives must be systematically matched with the various entities’ attributes. All major tax and nontax issues must be considered and alternatives explored before choosing the appropriate structure for your business.

As with most business decisions, meaningful, up-front planning will have a positive and lasting effect on your business venture. Please call us with questions about the appropriate entity structure for an existing business, a business you intend to purchase, or a contemplated new start-up business.

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