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CHOOSING A BUSINESS ENTITY
Starting your own business venture can be both an exciting and an
intimidating proposition. Often the initial focus is on the nuts and
bolts of getting the operation off the ground: where to locate the
business, obtaining capital for the start-up and initial operation,
targeting and reaching your market. In the midst of all these
considerations what you may overlook is the importance of deciding if
the venture will be operated through a business entity and if so, what
kind of entity.
You have probably seen the “alphabet soup” that follows business names
and not given it much thought: Corp., Inc., Ltd., LLC, LLP. Often not
understood, these letters (along with other variations) indicate the
kind of entity through which the business operates. A business entity
has its own legal existence, separate and distinct from the person or
persons who own, operate, invest in and/or work for the entity. Each
type of business entity has specific characteristics derived from state
law. Consequently, choosing a business entity entails a consideration of
the specific characteristics of each form and deciding which offers the
best advantages for the proposed venture. The following chart briefly
describes the main business entity types:
|
Administration |
Liability |
Pass Through Taxation?1 |
Comments |
| Corporation |
Governed by officers and/or a board of
directors. |
Generally, no individual has personal
liability |
No |
Probably the most familiar of the
business entities, the formal administrative requirements and tax on
income at the entity level may make this form cumbersome and
expensive for the small business owner. |
| Partnership |
Unless agreed otherwise, any Partner can
act on behalf of the partnership. |
Each Partner has unlimited personal
liability (for the debts of the partnership and the actions of the
other Partners). |
Yes |
May be a good form for the small
business owner due to the flexibility of administration and relief
from taxation at the entity level. However, the unlimited personal
liability of the Partners is a drawback. |
Limited Liability
Company |
At formation, the Members choose how the entity is to be governed:
Member managed (like partners) or designated managers (like officers
or a board of directors). |
No individual has personal liability. |
Yes |
This hybrid entity has the positive characteristics of a corporation
and a partnership. It is a very flexible form without the rigid
administrative requirements of a corporation. A limitation can be
the ability to obtain capital from public ownership. |
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Sole Proprietorship |
Governed by the Owner. |
Owner has unlimited personal liability. |
Yes |
A sole proprietorship may do business under a business name, but the
business is not a distinct and separate entity from the Owner. As a
result, the Owner retains absolute control and has unlimited
personal liability.
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1
“Pass-through taxation” means that
the business entity itself does not pay taxes on the business income.
Rather, all items of income and loss pass through to the owners of the
business and are reported on their individual income tax returns.
Choosing which entity type will best suit your new
business can be a difficult decision. However, this decision can have
both short term and long term impacts on all other aspects of your
business. At Aoki & Sakamoto LLP, our practice includes advising and
assisting individuals starting their own businesses. If you are
considering starting your own business and would like to discuss the
choice of entity or any other start up issues, please give us a call.
© 1999 - 2005 Aoki | Sakamoto | Grant LLP. All rights
reserved.
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