Selecting the right entity for your new business
In the rush to start a new business venture, people often overlook the importance of taking the time to select the right entity in which to structure their business. Selecting the right entity has both tax and non-tax implications that require all business owners to do proper planning and consult with legal and tax professionals.
Before ordering inventory, hiring employees, or printing some fancy business cards, all business owners should give some thought to these issues:
1. How will the business be run?
2. How will ownership interests be transferred?
3. Does the ownership structure need to maintain flexibility?
4. What happens if a homeowner dies, retires, or files for bankruptcy?
5. How will the owners be compensated?
6. What are the tax consequences for owners who invest capital in the business?
7. To what extent will the owners have responsibility for the debts and conduct of the business?
8. How will the earnings be taxed?
9. What type of benefits will be extended to employees?
One form of entity that has gained great popularity is the limited liability company, also known as an “LLC.” An LLC is formed by filing a Certificate of Organization with the Department of State and can have as few as one “member” (owner). Some of the key features of an LLC include:
-very flexible structure;
-Can be taxed as a partnership
-members of the LLC are not responsible for the debts and liabilities of the LLC
-Less paperwork than a corporation
-no annual fee for members
The operating agreement controls the relationship of the members.
Whether you select an LLC, corporation, LP, or some other business entity, it is an important consideration that should be addressed well before the start of your new business. Be sure to meet with an accountant and attorney, who have experience starting businesses, to assess which entity will best help you achieve your business goals.