A Basic Overview Of Commonly Formed Entities
Updated: Oct 22, 2021
Congratulations! You had an epiphany and finally decided to start the process of quitting your dead-end job and to fulfill your life-long dream of become an entrepreneur. As you work to turn your dream into a business, there are a few things you need to do in order to get set up. One of those things is to decide how you want to set up your entity. There are advantages and disadvantages when deciding which entity to form to start your new business. When picking what kind of entity to form for your startup business or if you are buying real estate, it is not the case of one-size-fits-all. Everyone has different needs which is why there are different forms of entities to choose from. Below is a general overview of the most common entities.
One of the common ways to set up an entity is by forming a sole proprietorship. This entity is generally known as the default entity formation. When forming a sole proprietorship, it usually requires less paperwork and legal filings. This entity is ideal for the person who does not plan on growing the business outside themselves and if the plan on self-financing the business. However, since sole proprietorships are legally indistinguishable from yourself you are liable for your business debts, liabilities, and losses. In the event something goes wrong, someone can sue the business and the business’s assets and your personal assets will be at risk.
Limited Liability Company
The most popular business entity people use when starting their business is forming a Limited Liability Company (“LLC”). This entity is more flexible compared to the others and allows for a flexible management structure. With an LLC, it provides a similar protection that a corporation has to its shareholders. It protects the owners from personal liability for business debts and claims, which means that if the business cannot pay a creditor, the creditor generally cannot come after an LLC member’s personal assets. However, there are exceptions to this where an LLC member can be personally liable to someone else.
Another common use for forming an LLC is for buying assets, such as real estate. Many people put their assets under entities in order to shield that asset from liability. For example, Terry decided to rent a property from Larry the Landlord. Terry falls behind on his rent because he has bought a few properties. Larry is trying to go after Terry and discovers the properties he purchased. However, Terry formed an LLC and titled the properties to the LLC. Generally, Larry would not be able to go after the properties Terry purchased because they are titled to the LLC.
Another common entity is a corporation. A corporation shares some similarities with an LLC, such as certain limited liability and the ability to elect as an S Corp for tax purposes to avoid double taxation. However, Corporations have a lot less flexibility than an LLC. Corporations require a lot of administrative duties in order to retain corporate status, such as holding annual shareholder and director meetings, keeping minutes of shareholder and director meetings, maintaining separate bank accounts from their owners, and so on. Corporations also require articles of incorporation and corporate bylaws for formation.
A corporation could be more appealing due to the ability to raise capital. When banks look to give small businesses a loan, they typically want the busines to be incorporated. Additionally, a corporation has stock unlike an LLC. A corporation can sell its stock in order to raise capital for the business. A corporation also has unlimited life, meaning the life of the corporation is not contingent on its owner(s) staying alive. Should the corporation’s owner(s) die, or if they decide to sell their interest in the entity, the company will continue to exist and do business as usual.
In the end, there is not one right answer on how to form an entity to suit your needs. Whether you want to start up a new business or you want to protect your assets, forming an entity is the best way to go and there are different options to achieve your goals. To contact an attorney to discuss your options, click here to contact Makris Legal, P.A.