The Best Business Form for You

The most common business form is the sole-proprietorship, but there are many other options:  C-corporation, S-corporation, professional corporations, partnerships, limited partnerships and limited liability companies.  It's possible that trusts or family foundations may be applicable to your circumstances although they are comparatively rare.  Businesses can be for profit, or not-for-profit.

In simplest terms, corporations and limited liability companies ("LLCs") are about restricting risk.  The effectiveness is constrained in practical application by this:  an individual can never avoid his own duties or escape personal negligence or malfeasance.

What does this mean?  If you are a business without employees or partners, then whether you form an LLC or corporation is often irrelevant.  Your biggest risk is an unfortunate accident where you inflict injury on others.  If it occurs during the course of your employment, then the injured person will sue both you and your company.

Once you move into the world of employees and agents, then the analysis changes.  If they are the cause of an accident, so long as your company is adequately funded and insured, you have a means of shielding yourself.  Remember, it's not just your employees who are at issue, but other companies and individuals you hire as contractors, or even supervise for others.  These third-parties may place your personal assets at risk in a lawsuit.  The proper corporate formation and adherence to form might protect you even though you may still be sued on some form of negligent supervision theory.

The other advantage of a corporate form is related to contractual obligations.  If you promise to do work or pay a debt personally, then folding your corporate form won't end the responsibility, but if you contract as the company, when the company is dissolved, then the agreement usually lapses as well.

As you can see, there is rarely an absolute in modern law.  Most positions are described as "likely, often, usually, probably."  The destruction of positive law is a matter for another day.  Suffice that the key is maintaining all the particulars of corporate form will increase the chances that you will be protected from personal suit.  The problem arises that most other corporations with whom you do business will not engage you in a serious contractual relationship without your personal guarantee of fulfillment.

So the circle is complete.  In the end, will the expense and time in maintaining corporate form be worth it?  Unless you're willing to learn the rules and follow them, probably not.

What are the forms:

Self-proprietorship - Doing business as yourself, or possibly under a fictitious name.  Without a doubt this is the most common business form and simplest.  There is no additional required level of record-keeping, taxes or obligation, although good business practices will dictate additional work in managing a profitable business.  In return for simplicity, all risk and obligations are personally borne by you.  That may include responsibility for others who work directly for you, are contracted by you, or contracted by others whom you then supervise.

Partnerships - Are rarely intentionally seen these days.  A partnership is most often created by a sole-proprietor "hiring" an employee who is in-fact a partner, even if neither individual recognizes that fact.  A formal partnership just rarely arises anymore.  If two or more people specifically set out to form a business, at least one of them knows about the ease with which Limited Liability Companies can be formed which have all the attributes of a partnership with greater protections.  I can't be more explicit.  Don't do a partnership.

Limited Liability Companies ("LLCs") - These are relatively new and simple corporate forms.  As I wrote about sole-proprietorships, they are hardly a panacea.  LLCs limit the liability of members and the members may choose to be taxed as a corporation or "pass-through" earnings to the members who pay taxes individually.  LLCs do not eliminate risk.  There are still formalities which must be followed in order to enjoy the benefits.  Nevertheless, this is the most frequent choice for a small business, particularly "partnerships" between two or more individuals.  Registering an LLC is a very simple task anyone can do on-line with the Secretary of State.  However, there is more involved than that.  Every LLC must have an operating agreement and a managing member.  It needs it own set of books and records, tax id and return.  Unless these procedures are followed, then the LLC doesn't really exist and the members have only a false sense of security.  They actually are operating a Partnership and each Partner in fact has full liability for the acts of the business and each Partner.  Pretty scary, huh?  This is where I can help.  I know the ins and outs, can prepare the documentation, guide you in the formalities and direct you to competent tax professionals.

S-Corporations. - "S-Corps" are special corporations under the IRS code.  Compared to the business forms discussed above, they are very rare and substantially more complex.  The primary benefit of an S Corp is that it is not a taxable entity.  Earnings are distributed to the shareholders who pay taxes at the individual level.

C-Corporations. - "C-Corps" were the first fictitious entity given a distinct legal status from their owners.  These are the most complicated business forms but the most adaptable.  A C-Corp can be a one-person operation with a single shareholder, or may be governed by a board of directors, run by a team of corporate officers and literally have millions of shareholders.  This is rarely the corporate form initially chosen for small businesses and entrepreneurs, although when the brilliant idea goes public this is the vehicle for getting there.


© William Hudnall 2011

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