We are often asked by our customers ‘What type of entity should I use for my new business and where should I form it?’ Although the this is a simple question, the answer typically depends upon what type of business you intend to open and how many owners the business will have.
As we receive this question often enough we have written this article to provide you with how most people would answer those questions based upon our experience and general knowledge in the industry.
Limited Liability Company or LLC: Small to Medium-Sized Businesses
An LLC is the easiest way to form and run a small to medium-sized business. It shields the owners’ personal assets from the business’ liabilities, offers the most flexibility in how the business is run, and has less formal requirements than a traditional corporation.
In short, it is the structure that most small businesses chose when forming an entity.
A Corporation was the traditional way to form and run a business until the invention of the LLC. Even though it has largely gone out of favor for small to medium-sized businesses in favor of the LLC, the Corporate entity structure is still favored by larger businesses that intend on having multiple owners in the nature of shareholders as well as for the tax treatment of gains and losses for the owners of the business.
In short, if you intend to have a business that retains investors through a shareholder system a Corporation may be the right entity for you.
A Nonprofit Corporation can generally be used by religious, charitable, or political organizations that wish to be exempt from state and federal taxes. Nonprofit Corporations can obtain public and private grants and, if qualified, are exempt from income, sales, and property taxes. Nonprofit Corporations, like LLCs and Corporations, also shield their owners’ personal assets from the business’ liabilities.
In short, if you wish to operate your business not-for-profit and qualify under U.S. and state tax laws to do so a Nonprofit Corporation may be the right entity for you.
An LLP is often the entity of choice for professional practices with multiple professionals. If the business only has one professional (e.g., doctor, lawyer, etc.) an LLC be used. But if the practice has multiple professionals who will own the business the LLP is the preferred structure. This is because an LLP shields the personal assets of the partners in the LLP against liabilities created by other partners.
In short, if you have a professional practice with multiple professionals who will jointly own the business an LLP may be the right entity for you.
A Sole Proprietorship or DBA is often the first “entity” used by small businesses. This decision, however, should not be undertaken lightly. Although a DBA allows a business to legally conduct business under the name of the DBA it does not shield the personal assets of the owner(s) against the liabilities of the business.
In short, with the relative simplicity of forming and operating an LLC, small businesses should think long and hard about operating as a Sole Proprietorship.
Lastly, where should you organize your new business?
In the old days states such as Delaware kept favorable tax and other laws on the books making them havens for business entity formations. In recent years, however, many of the advantages of forming an entity in a state other than which you will be operating have been negated. For instance, if you organized in Delaware but operated in Florida not only would you also need to file documents with the Florida Secretary of State officially notifying them of your operating a business in the state if you were to ever be sued you could have to defend a lawsuit in Delaware even if you have never done business there.
In short, if you organize in a state outside of your principal place of business not only will you increase your filing obligations you may also subject yourself to being hauled into court thousands of miles away from your business’s location.
As such, today most small businesses organize in the state in which they will be conducting business.
