Personal Injury Lawyer

So you’re thinking of opening a business? Awesome! Small businesses are the foundation of America. You could be well on your way to being your own boss and, fingers crossed, a better economic future. But before you open your doors, there are a few things you’ll want to consider, such as liability protection, taxation, and ease of business administration. These concerns are all a part of which entity you choose to do business as. The following list of pros and cons will help jumpstart your decision-making process. 

Sole Proprietorship 

Sole proprietorships may be utilized by a single-business owner (with no other partners). Sole proprietorships are easy to set up and administer since there are few startup concerns (you do not have to register with the Secretary of State and more) and annual reporting is minimal — you still must do your personal taxes, of course. However, sole proprietorship is not a separate entity. It is considered one and the same with you, and you and your business are indistinguishable. This means that you have personal liability for debts and lawsuit judgments. If you are a sole proprietor who wants protection from liability, you should form a Limited Liability Company (LLC) as the sole member or owner. 

Partnership

There are many different types of partnerships, the most common of which is a general partnership. At least two partners are needed in order to form a partnership. Like sole proprietorships, general partnerships are easy to create but do not offer liability protection for owners. Partnerships have a quasi-entity status, meaning they are treated as indistinguishable from their owners for some purposes (they have no protection for personal liability), yet are considered a distinct entity for other purposes. For example, a partnership entity must file its own tax return, in addition to sending each partner a K-1 that represents each partner’s share of partnership profit, loss, and other items. This quasi-entity status means there are more administrative burdens to operating a partnership as compared to a sole proprietorship. You don’t need a partnership agreement before you begin operations (state law provides a default one for you), but it is recommended that you and your partner agree to one should you ever have a dispute. 

Corporation

Corporations are ubiquitous in our lives. Many of the biggest, most well-known companies are corporations—Disney, Apple, Coca-Cola, etc. Operating as a corporation has its benefits, the most important of which includes easier access to capital and liability protection for shareholders. Despite the benefit of liability protection for owners, there is little benefit to operating as a corporation for the vast majority of new small businesses. Corporations are subject to more state oversight (reporting requirements and more.). Corporations are also subject to double taxation. Double taxation is less of an issue after the 2017 Tax Cuts and Jobs Act lowered the corporate tax rate to 20% however, that lower rate will change in the coming years. 

Limited Liability Company

If sole proprietorships and partnerships don’t offer liability protection and you don’t need the bells and whistles of a corporation, you might now be thinking, “So what kind of entity should I use?” You need an LLC! “LLC” stands for limited liability company. An LLC gives you the best of both worlds. It gives you liability protection without the headache (and double taxation) of running a corporation. Starting an LLC does require filing paperwork and a fee with the Secretary of State — along with filing subsequent annual reports and nominal fees — but that’s a small price to pay for personal liability protection. You can operate your LLC as an individual or with multiple members. If you have multiple members, it’s best to have an operating agreement (like a partnership agreement) to lay out the rights of each member should a conflict arise. With an LLC, you can have your business up and running in no time and with very little up-front costs, few administrative burdens, no double taxation, and with the peace of mind of liability protection. 

If you still feel confused and want to know more, contact a business attorney, like a business attorney in Montana, for more information today. 

Thanks to Silverman Law Office, PLLC for their insight into opening a small business.