Which type of Legal Entity Should I use for my Start-up Business?
If you are starting a new business either alone or with other investors, one of the first issues to be decided is which type of legal entity should be selected to operate the business. The basic choices these days are:
- Corporation
- Limited Liability Company
- General Partnership
- Sole Proprietorship
The two main considerations in selecting the type of business organization are liability protection and income tax consequences.
Prior to 1994, limited liability companies did not exist in South Carolina and the choice was more difficult. With the advent of the LLC, general partnerships and sole proprietorships have all but disappeared as the choice of entity for a prudent business person because they afford no limited liability protection to the owner in the event of a lawsuit against the business.
Through an LLC, the business can obtain the same income tax advantages of a sole proprietorship or a general partnership and receive the added advantage of giving the owners limited liability protection. We say "limited liability protection" because no business entity gives an owner unlimited liability protection. However, the likelihood of having personal liability for claims against the LLC are much reduced as compared to a sole proprietorship or general partnership.
Corporations have been around for 100 years. They offer practically the same limited liability protection to the owners as an LLC does, but they may not afford the same income tax advantages. Obviously corporations have a much larger body of case law construing corporate statutes so they are more predictable than LLC's but generally corporations do not offer the same flexibility in drafting structural and operational rules that is available to an LLC.
We always encourage our business clients to consult with their tax advisors to determine which entity has the most income tax advantages and we suggest using that form of entity unless there are other overriding business reasons to the contrary.
If your new business will own real estate, we almost always recommend that a separate entity, probably an LLC, be formed to acquire title to the real estate and then the LLC will rent the real estate to the start-up business. This helps insulate the real estate investment from the more risky start-up business.
- 1 year ago
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