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Attorney Edward Alkalay writes a regular column for the Conway Daily Sun newspaper entitled "The Legal Corner." His articles address a wide variety of timely legal issues. Click on the titles below to review his past articles.
 

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The Legal Corner: Going into Business? Research the Best Business Structure to Fit Your Needs

Many people who are considering going into business for themselves, or who already own their own business often ask what type of business structure will best fit their needs. As with so many other business and legal decisions, the answer is: it depends. Below, I will attempt to provide some basic differences between business structures and the relative advantages/disadvantages of each.

(1) Sole Poprietorship: This is a form of business that makes no legal distinction between the individual owner and the business itself. This type of business is very easy (and inexpensive) to set up. Moreover, there are very few administrative or regulatory requirements. Finally, the owner is taxed only once on his or her personal income tax return.

However, the disadvantages are severe. That is, the owner of such a business is personally liable for the actions of the company. This provision will make most people hesitate to use this form of business structure because one of the main advantages of a business structure is to protect your personal assets from those of the business. One way to protect your personal assets even in this form of business is to buy insurance to protect yourself against the personal liability assumed by this structure.

(2) Partnership: As with a sole proprietorship, members of a partnership are personally part of the business. That is, the partnership is not a separate entity from the individual partners. The advantages and disadvantages are very similar to those of a Sole Proprietorship. However, one wrinkle that all partners must be aware of is that each individual partner is responsible for the business actions of the other partner(s). So, if one partner enters into a deal on behalf of the Partnership, all other partners are bound by the deal and must comply with the provisions of it. Needless to say, in this form of business structure, you must be very careful of who you choose to go into partnership with. Additionally, it is very important to draft a partnership agreement that is satisfactory to all partners, as the partnership agreement will detail how the partnership is to be run.

(3) C Corporation: This type of business structure creates a separate legal entity from the individual owners. A business operating as a C Corporation conducts its operations on its own just as a person would do, such as entering into contracts, borrowing or investing money, and making other business decisions. The most obvious advantage of such an arrangement is that the shareholders are not personally liable for legal business decisions. Moreover, ownership is more easily exchanged, and (in general) it is an easier structure in which to raise capital.

Some disadvantages include that: owners are taxed twice (once as a business and also individually), there are generally somewhat higher administrative costs, and there are also relatively more regulatory requirements than with certain other business structures.

(4) S Corporation: This type of business structure is taxed like a sole proprietorship, but is subjected to certain limitations, such as the number of shareholders permitted. The major advantages to this type of structure is that owners are only taxed one time and shareholders are not personally liable for the legal actions of the business.

Among the disadvantages are that there are generally higher administrative costs, and there are more regulations than other business structures such as partnerships and sole proprietorships. Additionally, S-corporations are limited to a certain number of shareholders (75), whereas a C-corporation can have unlimited shareholders.

(5) Limited Liability Company: An LLC is a hybrid business structure which is (in general) taxed like a sole proprietorship, but with the same liability protection of the corporate structure (to protect an owner/shareholder against personal liability for legal actions of the business). The main advantages are that owners are taxed once, you are protected from wrongful actions of employees and independent contractors, and that there is limited personal liability for legal business actions. It is important to note, however, that a member or manager may still be liable in certain circumstances for tortious conduct or for personal guarantees of LLC liabilities.

Disadvantages include: generally higher administrative costs and more regulations than partnerships or sole proprietorships. Additionally, LLC laws are not uniform across the United States. Therefore, you must be very careful about this structure if your business operates in more than one state.

LLCs are used by many businesses in Mount Washington Valley because of the advantages that this hybrid structure gives to a business. LLCs may seem very closely related to S Corporations because they are. However, some basic differences between the two include that in an LLC there is no restriction on the number of owners and there is generally more flexibility in distributing income. Additionally, an LLC has more protection as a two or more person LLC, while an S Corporation needs only one person.

(6) Limited Liability Partnership: This structure is very similar to a general partnership, but partners can be classified as general or limited partners. General partners are responsible for the business operations, while limited partners are simply investors. Some advantages of a limited liability partnership are that an owner is only taxed on his/her personal return and limited partners have limited liability.

Certain disadvantages include more complex administrative requirements than a general partnership, and that general partners still have personal liability.

Conclusion: Business owners should give careful thought to the business structure that best fits their needs. Different businesses have different concerns. The business structure that an owner selects forms the foundation for the business. Consequently, it is critical that the foundational business structure that one selects is appropriate for the business from a tax, liability and administrative standpoint.

Edward D. Alkalay is a partner at Alkalay & Smillie PLLC and can be reached at (603)447-8994 or ed@northconwaylawyers.com. (This article conveys general information and should not be relied on for legal advice without further research and/or consultation with an attorney.)

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