Generally a business can be operated personally (sole proprietorship or partnership) or through an authorized legal entity (corporation, limited liability company, etc.). In the former, you and your partners’ assets are exposed to any business liability. In the latter, you can limit the owners’ personal liability to their investment in the business and damages caused by their own wrongful conduct. Limited liability is a great incentive to use a legal entity, but it requires following the law to establish, maintain and operate it.
Business entities generally fall into two categories, corporations and limited liability entities. Your accountant, lawyer and business advisor can help select the proper entity for your business, often based on its history and your business plan. Both require initial filing and yearly fees to the authorizing state and other states where it conducts business, a federal employer identification number, and other licenses to conduct business. Both must maintain separate books and accounts, and file income and other tax returns. Both can allow for the pass through of gains and losses to the owners or their taxation on the entity level, management by owners or managers, and different types of ownership. Despite the existence of the entity, its owners may still have to guaranty certain debts.
Selecting between a corporation and limited liability entity requires evaluating their differing benefits and limitations to match your current and future business needs. Limited liability entities are often seen as less formal and more adaptable, but owner agreements in corporations can serve the same purpose. While the limited liability entities may not have all of the record keeping and annual requirements of a corporation, they are minimal and often recommended anyway. Limited liability entities usually work best for more passive investment or single purpose businesses without employees and with limited expenses.
Selecting between a corporation and a limited liability entity to operate your business should be done with the same consideration and deliberation as the other aspects of your business plan. Once decided, you should know what is required to maintain your entity and protect your assets. We can assist you in selecting, organizing and maintaining your business entity.
Douglas C Tibble
dtibble@napervillelaw.com
