Choosing the best legal entity for a new business is an extremely important decision.
Is opening a new business in the Pacific Northwest one of your 2015 resolutions? With the economy on the upswing, it just might be the right time to launch the business you have been planning in Oregon, Washington, or California.
Up front, it is important to seek an experienced business law attorney to advise you throughout the process. One of the first and critically important questions is which kind of business entity is the wisest choice in your situation. You and your lawyer will discuss the goals of your business plan in detail in order for your lawyer to provide informed guidance through the many factors that go into choosing a legal entity.
The choice of legal entity impacts a wide array of issues, but the main ones to consider are:
- Who will control and manage the business?
- Will the owner be personally liable for business debts and liabilities?
- What will the tax ramifications be?
Establishing a legal entity is largely a matter of state law, so the business statutes of Oregon, Washington, or California respectively, depending on the location, will control start-up issues like drafting necessary documents, state filings and fees, state tax issues, and more complex matters of business creation and governance. Federal laws of taxation obviously also play a major role in entity choice.
Some of the more common legal entities used by businesses:
- Sole proprietorship: This is the simplest way to do business and does not technically involving creating a separate legal entity. A sole proprietorship happens when an individual starts doing business for him or herself, making management decisions, personally owning business assets, and taking responsibility for business debt and liability. Tax matters are handled on the owner's personal income tax return.
- Corporation: Incorporating a new business is a popular alternative that creates an artificial legal entity that generally insulates the incorporators, directors, and shareholders from corporate debt and liability. The corporation is managed by a board of directors and officers, and ownership is vested in those who buy stock or shares of the corporation, called stockholders or shareholders. Corporations are tax-paying entities, but corporate dividends paid to shareholders, and salaries and wages paid to employees, are taxable to those individuals.
- General partnership: A partnership is created when two or more people join together to do business. Business decisions and management are the responsibility of all general partners equally. Depending on the jurisdiction and type of liability, individual partners are generally personally liable for debts and obligations of the partnership. Profits and losses of the business are handled on the individual partners' tax returns.
- Limited liability company: A limited liability company, or LLC, is created by filing a special document with the relevant state authority. Owners are called members, who are generally not personally liable for obligations of the LLC. Usually the founding document says whether the LLC is managed by its members or by separate managers. Usually the LLC is not a separately taxed entity for federal tax purposes and profits and losses are reported by individual members on their own returns.
Other types of entities include joint ventures, limited partnerships, nonprofit corporations, and others, depending on the applicable state's laws. The laws - and pros and cons - applicable to each type of entity are complex and no cookie-cutter approach to entity choice exists.
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