JEFFERSON JEFFERSON COUNTY ECONOMIC COUNTY ECONOMIC

DEVELOPMENT DEVELOPMENT CONSORTIUMCONSORTIUMBASICS TO CHOOSING A BASICS TO CHOOSING A BUSINESS STRUCTUREBUSINESS STRUCTURE

DISCLAIMERDISCLAIMER

Remember to check with Remember to check with your lawyer and/or your lawyer and/or accountant about the accountant about the advantages and advantages and disadvantages of selecting disadvantages of selecting any business entity. any business entity. Before you start!Before you start!

ENTITY CONSIDERATIONSENTITY CONSIDERATIONS

Your vision about the size and nature of Your vision about the size and nature of your business. your business.

The level of control you desire/need.The level of control you desire/need. The level of "structure" you are willing to The level of "structure" you are willing to

deal with and be involved in. deal with and be involved in. The business's susceptibility to lawsuits. The business's susceptibility to lawsuits. Tax considerations ownership structures. Tax considerations ownership structures. Expected profit (or loss) of the business. Expected profit (or loss) of the business. Whether or not you need to re-invest Whether or not you need to re-invest

earnings into the businessearnings into the business

TOTO PARTNER OR PARTNER OR NOTNOT

PROS:PROS:

There is safety in numbers. two heads discuss and make There is safety in numbers. two heads discuss and make decisions. decisions.

You may not need to be at the business at all times.You may not need to be at the business at all times. You may have someone else who will be there to share the You may have someone else who will be there to share the

load and permit you to take a vacation and have sick time. load and permit you to take a vacation and have sick time. You may also have a highly motivated co-worker, not just You may also have a highly motivated co-worker, not just

someone who is earning a paycheck. someone who is earning a paycheck. Partners can also be advantageous when they have Partners can also be advantageous when they have

complementary skills. complementary skills. It may be necessary to have a partner to contribute capital It may be necessary to have a partner to contribute capital

and share the risk when things do not proceed as plannedand share the risk when things do not proceed as planned..

TO PARTNER OR TO PARTNER OR NOTNOT

CONSCONS::

Share the rewards if the business is Share the rewards if the business is successful. successful.

Control over the business Control over the business You will have to share the recognition that You will have to share the recognition that

will come if the business is successful. will come if the business is successful. Poor partner judgment. Poor partner judgment. Necessity of one partner buying the other out Necessity of one partner buying the other out

if you do not get along at an inopportune if you do not get along at an inopportune time. time.

The Sole ProprietorshipThe Sole Proprietorship

The Sole ProprietorshipThe Sole Proprietorship

The sole proprietorship quickest and easiest way to set up a The sole proprietorship quickest and easiest way to set up a business operation.business operation.

There are generally few prerequisites, nor are there any specific There are generally few prerequisites, nor are there any specific costs in starting a sole proprietorship. There may be some minor costs in starting a sole proprietorship. There may be some minor formalities. You may have to: formalities. You may have to:

obtain an occupancy permit for your place of business,obtain an occupancy permit for your place of business,file an assumed business name if other than your own file an assumed business name if other than your own

name,name,secure a business license, andsecure a business license, andapply for a franchise or registration number for your apply for a franchise or registration number for your

operation. operation.

If you are in a community property state your spouse is vested If you are in a community property state your spouse is vested with a one-half interest in assets. with a one-half interest in assets.

The General PartnershipThe General Partnership

The General PartnershipThe General Partnership General partnership is a relatively easy process. Few General partnership is a relatively easy process. Few

formalities are required however you should have written formalities are required however you should have written agreement. Seek legal counsel! Some of the reasons to agreement. Seek legal counsel! Some of the reasons to have a written agreement include: have a written agreement include: • the amount of capital each partner is expected to the amount of capital each partner is expected to

contribute and contribute and when; when; • the rights and duties of the partners; the rights and duties of the partners; • the method for sharing profits and losses; the method for sharing profits and losses; • the authorization for cash withdrawals and salaries, the authorization for cash withdrawals and salaries, • the methods for resolving disputes or taking in new the methods for resolving disputes or taking in new

partners; partners; and and • the method for dissolving the partnership should the method for dissolving the partnership should

dissolution dissolution become necessary. become necessary.

The Limited PartnershipThe Limited Partnership

The Limited PartnershipThe Limited Partnership

Similar to a general partnership major difference is the limited Similar to a general partnership major difference is the limited partner is protected by law to the amount of his investment. It partner is protected by law to the amount of his investment. It enables this special type of investor to share in the partnership enables this special type of investor to share in the partnership profits without being exposed to its debts in the event the profits without being exposed to its debts in the event the company goes out of business. Here again you should have a company goes out of business. Here again you should have a written agreement.This protection exists generally as long as the written agreement.This protection exists generally as long as the limited partner does not play an active role in the partnership limited partner does not play an active role in the partnership operation.operation.

CORPORATIONSCORPORATIONS CORPORATIONSCORPORATIONS

The corporation is considered an artificially The corporation is considered an artificially created legal entity that exists separate and apart created legal entity that exists separate and apart from those individuals who created it and carry on from those individuals who created it and carry on its operations. Whereas partnerships and its operations. Whereas partnerships and proprietorships are based upon individuals. proprietorships are based upon individuals. A corporation can be formed by filing an A corporation can be formed by filing an application for a charter with the state. The application for a charter with the state. The application will include:application will include:• the purpose of the intended corporation,the purpose of the intended corporation,• the names and addresses of the incorporators,the names and addresses of the incorporators,• the amount and types of capital stock the the amount and types of capital stock the

corporation will be authorized to issue, andcorporation will be authorized to issue, and• the rights and privileges of the holders of each the rights and privileges of the holders of each

class of stock. class of stock.

WHY INCORPORATEWHY INCORPORATEPROS:PROS:

• Limited Liability.Limited Liability. shareholder generally is not legally liable for the shareholder generally is not legally liable for the actions of the corporation. This is because the corporation has its own actions of the corporation. This is because the corporation has its own separate existence wholly apart from those who run it. separate existence wholly apart from those who run it.

• Unlimited life.Unlimited life. It can continue indefinitely until it accomplishes its It can continue indefinitely until it accomplishes its objective, merges with another business, or goes bankrupt. Unless objective, merges with another business, or goes bankrupt. Unless stated otherwise, it could go on indefinitely. The partnership and sole stated otherwise, it could go on indefinitely. The partnership and sole proprietorship end when owner dies or changes. proprietorship end when owner dies or changes.

• Transferability of sharesTransferability of shares • Ability to raise investment capitalAbility to raise investment capital

CONS:CONS:• responsible for additional record keeping requirements and responsible for additional record keeping requirements and

administrative details.administrative details.• Costs annual fees. Costs annual fees. • Some cases, operating as a corporation can create an additional tax Some cases, operating as a corporation can create an additional tax

burden. burden.

The Limited Liability CompanyThe Limited Liability Company (LLC)(LLC)

A limited liability company provides limited liability for all of its members, but typically can A limited liability company provides limited liability for all of its members, but typically can be treated as a partnership for federal income tax purposes.be treated as a partnership for federal income tax purposes.

It can be managed by all of the members or can have centralized management in one or more It can be managed by all of the members or can have centralized management in one or more of the members. of the members.

Preferred choice in the following situations where: Preferred choice in the following situations where: • · Legal liability protection is a primary concern· Legal liability protection is a primary concern• · A simplified "one time" tax on the owners is preferred to dealing with cumbersome · A simplified "one time" tax on the owners is preferred to dealing with cumbersome

corporate tax liabilitycorporate tax liability• · The entity cannot qualify for subchapter S status. · The entity cannot qualify for subchapter S status. • An LLC is a hybrid entity that has the legal protections of a corporation and the ability to An LLC is a hybrid entity that has the legal protections of a corporation and the ability to

be taxed (one time) as a partnership. In many regards, LLCs are treated much like S be taxed (one time) as a partnership. In many regards, LLCs are treated much like S corporations for tax purposes. However, there are some additional advantages over S corporations for tax purposes. However, there are some additional advantages over S corporations, including the following examples: corporations, including the following examples:

• · The LLC usually offers better leeway for owners who wish to write off business losses in · The LLC usually offers better leeway for owners who wish to write off business losses in a business that relies on entity-related debt that is incurred a business that relies on entity-related debt that is incurred

• · The LLC allows greater flexibility for the owner to take assets out of the company · The LLC allows greater flexibility for the owner to take assets out of the company without incurring unplanned tax liability without incurring unplanned tax liability

• Generally a LLC could be established by filing a simple, one-page document, which lays Generally a LLC could be established by filing a simple, one-page document, which lays out the Articles of Organization.out the Articles of Organization.

• You can form an LLC for any lawful business as long as the nature of the business is not You can form an LLC for any lawful business as long as the nature of the business is not banking, insurance, and certain professional service operations. Abanking, insurance, and certain professional service operations. A

• n LLC takes on a separate identity. Similar to a corporation, but without the tax problems n LLC takes on a separate identity. Similar to a corporation, but without the tax problems of the corporation, it will be taxed like a partnershipof the corporation, it will be taxed like a partnership . .

  PROPRIETORSHIP PARTNERSHIP CORPORATION LLC LLP

         

         

SUITED SINGLE OWNER TWO OR MORE OWNERS SINGLE OR MULTIPLE SINGLE OR MULTIPLE

         

FORTAXED @ INDIVIDUAL

RATE PERSONAL LIABLE OWNERS OWNERS

  OWNER PERSONALLY      

  LIABLE      

         

TYPE OF INSEPARABLE INSEPARABLE SEPARATE LEGAL SEPARATE LEGAL

ENTITY FROM OWNER FROM OWNER ENTITY ENTITY

    PARTNERSHIP MAY HAVE    

    DEBTS AND PROPERTY    

PRO INEXPENSIVE INEXPENSIVESEPARATE LEGAL

ENTITY LIMITED LIABILITY

  FEW ADMINISTRATIVE FEW ADMINISTRATIVE LIMITED LIABILITY PASS THROUGH

  DUTIES DUTIES TRANSFERABILITY UNLIMITED OWNERS

      CAPITAL RAISING MAY SALE OF INTEREST

      BE EASIER  

CON UNLIMITED LIABILITY GENERALLY LIMITED LIABILITY MAY BE COSTLY TO

  NO TAX BENEFIT UNLIMITED LIABILITY FRINGE BENEFITS FORM

  LIMITED LIFE LEGAL DISSOLUTION TAX SAVING

MORE ADMINISTRATION

    UPON DEATH OR CHANGE CAPITAL RAISING  

    OF PARTNER    

    INDIVIDUAL    

TAXES OWNER RESPONSIBLE PARTNERS ARE C CORP PAYS OWN TAX TAXES AS IF

  SCHEDULE C RESPONSIBLE S CORP EACH OWNER PARTNERSHIP

  1040 FORM 1065 FORM 1120 FORM 1065

      OR 1120S SCHEDULE K-1