Choosing the right business entity is an important step in starting or growing a company. The choice of one over another can affect liability exposure, taxation rates, management choices, and financing opportunities. Oftentimes, there is no clear choice. Moreover, when a business changes or evolves over time, it may need to modify the selected entity.
What are business entities?
There are many types of business entities in North Carolina, including:
– Sole Proprietorships
– Partnerships
– Limited Partnerships (LP)
– Limited Liability Partnerships (LLP)
– Corporations
– Limited Liability Companies (LLC)
If you need help deciding which entity may be best for you, or are thinking of modifying an existing company, our attorneys can help. Our firm regularly handles business issues in Raleigh, Cary, Apex, and surrounding areas. We have the experience to help you protect yourself on the front-end from such suits.
Initial considerations must focus on the number of owners who will be involved in the business. Single owners are precluded from operating as a Partnership, LP, or LLP. However, single owners can operate as a sole proprietorship, corporation, or LLC.
Two or more owners have more flexibility because they may operate every other entity.
What to consider.
Some of the factors to take into consideration when choosing the right business entity include:
– Costs of operation
– Attraction to investors
– Tax advantages and avoidance of double taxation
– Personal liability and exposure to risk
– Ownership issues
Sole Proprietorships and Partnerships
Sole proprietorships and partnerships have no legal distinction from the owners. For that reason, the owners are liable for all debts and obligations of the company. The owners also report all income and expenses on their own income statements.
Corporations
Corporations are separate from their owners for both legal and tax purposes. A main objective of incorporation is to create a corporate entity apart from the operators. Specifically, having a separate legal entity gives protection to shareholders in ways other entities cannot. However, the biggest disadvantage of a corporation is taxation. The corporation is taxed both at the entity level and will be taxed again if dividends are distributed to shareholders. “S” Corporations can oftentimes avoid much of this double taxation if set up properly.
Limited Liability Company (LLC)
LLCs have three main benefits. Firstly, a limited liability company, as its name implies, typically provides members with limited liability protection for their personal assets. Secondly, there is no “double taxation” as is the case with many corporations. Finally, an LLC offers significant flexibility in the management of the business. It can be managed by its members, managers, or its members and officers.
Limited Partnerships (LPs)
LPs divide the partnership into two categories. First, one or more “general partners”. Second, one or more “limited partners.” General partners are responsible for managing the operations, debts and obligations of the partnership. Limited partners are prohibited from taking part in the management of the operations, but they are excluded from personal liability. Given that, LPs require a written partnership agreement. Licensed professionals such as attorneys, accountants, architects, and medical professionals use LLCs most frequently. Partners in an LLP are generally not liable for debts and obligations of the partnership. They are, however, liable for their own negligence and wrongful acts.
We can help.
If you are contemplating forming or modifying a business, or if you have a potential business dispute, contact us today. Call us at 919.526.0450 or submit a new case inquiry here. The firm’s civil attorneys represent all types of business entities and offer free initial consultations for inquiries.
