Business Formations Information Center

Do you know what kind of entity will best fit your new business? From limited liability companies to Sub-chapter S corporations, there are a number of different options, all with distinct advantages. While some business entities have more beneficial tax structures, others can help you limit your liability. We will help you find the one that works best for your business. Contact us today for more information.

Choosing a Business Structure

Is your business about to take part in a real estate transaction? From purchases and sales to lease agreements, we can help. At the law offices of Henderson & Harris, LLC, we have handled thousands of real estate transactions. We can help you explore your options and make sure you are getting everything you expect out of your real estate contract. Contact us today for more information.

When forming a new business, selecting the business structure is one of the most important decisions you will have to make. Business structures, including the sole proprietorship, partnership (general or limited), corporation and limited liability company (LLC) each have distinct advantages and disadvantages. Determining which structure will best suit the needs of your business and the owner(s) can depend on several different factors, the most important of which are generally liability considerations and tax consequences. When deciding on which business organization to use, an attorney at Henderson & Harris, LLC in Richmond Hill, Georgia can provide you with information about the different structures and help evaluate your goals and objectives.

Liability Considerations

The first factor to consider is how important liability will be to your business. If there is the possibility that it could be sued or accrue debt, then it is probably best to avoid being a sole proprietor or a general partner. Both forms do not provide any personal liability protection from business creditors. In addition, if you have personal debt or are at risk of having personal creditors, then these two business structures will not protect your business assets from your personal creditors.

If personal liability is not a major concern, you can avoid the double taxation of a corporation and formalities of many of the business structures, and opt for a sole proprietorship or general partnership. Legally, they are simplest business structures to form and operate. Keep in mind that even though an owner is only responsible for his or her own personal income tax, it is still best to keep the business finances separate from one's own personal assets. Allowing business and personal finances to merge may make it difficult to calculate business profits and manage finances efficiently.

Tax Consequences

The next major factor in choosing a business type is how the business will be taxed. A drawback of the traditional C Corporation is that it is taxed at both the corporate level and when distributions are made to the owners. This is known as "double taxation." Sometimes this is desirable because it keeps the owners out of a higher tax bracket, but generally, if a company wishes to minimize taxes, a "pass through" business type is usually the model of choice. This means that the business itself is not taxed. All business profits or losses are passed through to the owners to report on their own personal tax returns.

The most popular "pass through" business structure currently is the limited liability company (LLC). The LLC also provides limited liability to its business owners. This coupled with the relative freedom that LLCs have from government rules and regulations for business operations, makes it a viable option for emerging businesses.

Another option that has pass through taxation is the S Corporation. It is taxed similarly to the LLC, but it does have more restrictions. To qualify as an S Corporation, the corporation must be a domestic corporation with no more than 75 shareholders, all of whom are US residents and citizens. The shareholders must also all be individuals, estates or certain qualifying trusts, and the corporation must only issue one class of stock. Partnerships also enjoy pass through taxation so that the partnership itself is not taxed.

Changing the Form of A Business

If the nature of your business has fundamentally changed from the time you initially selected a business form or if the owners' needs have substantially altered, it may be necessary to consider changing the structure of the business. For example, a growing sole proprietorship may wish to switch to a partnership to allow for additional owners. General or limited partnerships may opt to become LLCs to take advantage of the limited liability available to all members. Another scenario in which a conversion to a different business organizational structure is advisable is if the tax laws and other regulations to which the business is subject have substantially changed.

When deciding whether to convert to a different business structure, there are a number of issues that you and your attorney should discuss, including:

Whether shareholders' personal liability will be affected by the conversion
If it is necessary to change registration information for copyrights, patents or trademarks
How the business's banking and loan agreements will be affected
Whether the conversion will affect compliance with governmental regulations for permits and licenses
Providing creditors with notice of any name change or change in state of organization
Filing a record of conversion with the clerk or recorder's office in each county where the business has title to real property
How the change will affect the internal management of the business and the rights and responsibilities of officers and principals

See Gutterman, Alan S., Business Transactions Solution, "Conversion and Other Changes in Form of Business Entity," 2007. Careful thought should be given to each of the above issues, as well as to the potential tax consequences of converting to a different organizational structure.

Conclusion

It is important to have a firm understanding of the various business types and government regulations prior to starting a business. For more advice on selecting a business organization, you should consult with a lawyer. An attorney at Henderson & Harris, LLC in Richmond Hill, Georgia can explain the various business organizations to you and help you choose the one that best meets your needs.

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.

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