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Choosing a Business Entity
Question.
A first question in starting a business is "What business entity should I be? "
Choices.
The choices are numerous. Some will be easily ruled out. Most people are generally familiar with at least some of the various common business entities: corporations, partnerships, limited liability companies, and sole proprietorships. Some of these have subcategories, such as corporations, which can be C corporations or S corporations. Partnerships can take the form of general partnerships, joint ventures, limited partnerships, or limited liability partnerships. Most of these business entities are governed by local state statutes, with federal income tax code and regulations affecting the formation and operation of the business entity.
LLC.
In recent years the limited liability company ("LLC") has become the most appropriate business entity in most situations. The LLC entity has a long history in European and other foreign countries. Only in the last couple of decades has the LLC been used to any extent in the United States. By now all fifty states recognize the LLC and have statues governing the formation, operation, and termination of LLC entities. The advantages of an LLC over other business entities are substantial and numerous. A quick outline of the advantages includes:
-Has the same liability protection against third parties as a corporation.
-Can be taxed as partnership, with single level, flow-through taxation, as opposed to the double taxation of a corporation.
-Flexibility of business deals and sharing of profits, losses, capital; as opposed to strict proration under an S corporation.
-Losses , which are common to a start-up business venture, can pass through the entity and be deducted directly by the owners of the business, as opposed to losses in a corporation which accumulate and are limited in how they may be used.
-All members/owners of the LLC can be protected from liability, as opposed to a limited partnership where one partner has to be a general partner and thus exposed to liability for all partnership actions.
-LLC's are easy to form and easy to dissolve compared to issues arising in corporations where appreciated assets can cause difficulties when a successful corporation is liquidated.
Choosing a business entity form has been simplified in recent years. An LLC is likely to be the entity of choice for a new business, except in limited circumstances where a C corporation would be the appropriate corporate form. When creating the business entity you will want to speak with an experienced lawyer who can assist you in preparing the internal business documents, registering with the state, maximizing protection from liability, minimizing tax issues.
Increased Filings.
In the past five years (1997 through 2001) the filings with the Secretary of State for domestic and foreign LLCs have almost doubled from 6,279 to 12,231. Domestic corporation filings have dropped slightly from 12,350 to 11,666. This is an indicator that more people are finding that the LLC is the appropriate entity. Since it is expected that many corporations are filed without knowledge of the other types of business entities available, the numbers of LLC's would likely be significantly higher if an analysis were conducted by the person filing.
This information is general in nature and should not be relied upon for your specific circumstances. For information, questions, or comments, please contact Douglas J. Engel at 206-728-5858 or engel@dle-law.com.
Additional Business Articles
For additional information, click on one of the categories below, depending on your circumstances.
Business entities for multiple owners.
Sole owner of a business, reasons for a single member LLC in a service business.
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The information in this web site is all general information. The information is applicable only to the state of Washington, unless otherwise stated. This general information is not legal advice for your particular circumstances. If you have legal questions you should consult your lawyer.