The Law Office Of

Neal Jacobs

8118 Corporate Way, Suite 110, Mason Ohio 45040

NJ

Choosing The Right Business Entity

Choosing the right business entity is an important decision that should be made in conjunction with your attorney and accountant. The most common entities are the sole proprietor, partnership, corporation and limited liability company.

Business Paper

A sole proprietor provides control to a single owner who files a Schedule C (a Profit or Loss from a Business or Profession) with his or her personal income taxes. A partnership, on the other hand, allows for a number of business owners. The partners should have a Partnership Agreement setting forth the partners rights and responsibilities.  It should also address eventualities such as the mechanism for the sale of a partner’s interest in the business and the transfer of ownership upon the death of a partner.  Partnership income "flows-through" directly to the business owners. A problem with both the sole proprietor and the partnership is that the individual can be sued individually!

In contrast, a corporation provides limited liability to the shareholders in the business.  There are reporting and filing requirements and following corporate formalities.  In addition to "limited liability", for most businesses the income tax flexibility and broad range of tax deductible benefits are a driving factor in electing to create a corporation. One problem is that a corporation may trigger "double taxation".  That is, corporate profits are taxed at the corporate level, and may be taxed on the individual level as taxable dividends.

Corporations that are commonly referred to as "S Corps." are a hybrid resulting from an election with the Internal Revenue Service.  The S Corp. offers owners the benefits of limited liability, while allowing company profits or losses to flow directly through to the business owners for income tax purposes.  This avoids potential double taxation.  There are limits on the number of owners of an S Corp. and another corporation may not be an owner.  

A limited liability company or LLC, like a corporation, provides its "members" with limited liability for the debt and risk associated with ownership. The LLC also avoids the "double taxation" of the corporation by functioning as a "flow-through entity" for income tax purposes.  Single member LLC's are permitted.  If there is more than one member, the parties should have an attorney draft an Operating Agreement which sets forth the rights and obligations of the members including how membership interests may be transferred, how important decisions are to be reached and the mechanisms for the sale or closing the business.

The mechanics of forming a business entity is the first step.  More important is selecting the correct entity as it may have long-term effects on the ownership, owner liability and taxation.  If you are going to start a business, or wish to formalize your current business, you call The Office of Neal D. Jacobs.   

 

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