Starting a business? What entity is right for you?

By Darius Sharpless

   In my previous career as a DJ and MC, I traveled to dance halls, bars, and private clubs. Often, I hired dancers and other entertainers to spice up events. Not one time during my two years as a sole proprietor, did I realize how much jeopardy I was in or the liabilities to which I was exposed. Luckily, I remained unscathed as the business faded into memory. Here, I have compiled a list of the six primary business entities. Knowing the pros and cons of each will help you decide which entity is best for you. With this knowledge, you can avoid the great risks I took when I started my first business.

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1. Sole Proprietorship: If you are just getting started and have not spoken to an attorney, this is probably where you are now. A sole proprietorship simply means you are an individual who owns and operates a business. The biggest benefit to a sole proprietorship is that there are no legal requirements. Just start running your business and earn a profit! The downside to sole proprietorship is the liability. A sole proprietor is considered one with the business, meaning any liabilities the business is responsible for, the individual is also responsible for. As a sole proprietor, make sure your business is safe, with minimal risk.
2. General Partnership: This is the big brother of the sole proprietorship. When a group of two or more people get together and start doing business, a general partnership has formed. These partnerships may also be formalized in writing and often are, however this is not required. With the ease of formation also comes the exposure to liability. Like sole proprietorship, a general partnership exposes every partner’s personal assets to the liabilities and obligations of the business. If you are in a general partnership, make sure you trust your partners and keep everyone on the same page.
   
3. Limited Liability Partnership (LLP): These entities are most common in the legal and accounting industries; however, investment groups utilize these entities as well. An LLP is like a general partnership, but unlike general partnerships, the partners in an LLP are limited in their liability, hence the name. Partners in an LLP are still personally responsible for their own tortious conduct. LLPs may be taxed as partnerships or corporations, giving you some flexibility with the IRS. Finally, LLPs must be registered with the secretary of state, compliant with state standards.
   
4. Limited Liability Company (LLC): Currently the most popular business entity for small businesses, the LLC keeps your business legally separated from your personal assets. This means creditors can only satisfy their claims against company assets. Make sure to create a written operating agreement if you want a business checking account, as all banks require that you complete this step. Not only do operating agreements prevent future conflict within the company, but members of an LLC may also lose their limited liability status if their company appears to operate more like a partnership or a sole proprietorship if there is no operating agreement in place. The legal field calls this “piercing the corporate veil,” meaning your personal assets could once again be at risk. LLCs may operate like general partnerships, including everyone in the decision-making process, or a small group of managers can act as agents for the entire organization. There are some tax bonuses as well, such as an LLC’s ability to be taxed through its individual members, or as a corporation. The LLC is a viable option for the entrepreneur in need of legal protection as their side hustle grows into a serious gig.
   
5. S and C Corporations: Corporations, like LLCs, limit creditors’ access strictly to your business’s assets. Corporations require state-level filing, have bylaws, and issue stock. Stock is what makes corporations unique. Shareholders either purchase stock or are gifted stock which fluctuates in value with the fortunes of the company. S corps pass the tax burden onto the shareholders whereas C corps are taxed on both a corporate and individual level. Known as “double taxation,” because it is, C corps must pay tax on its profits as a corporation, but then shareholders of that company are taxed as well when they receive dividends from the company. In exchange for the lower tax burden, S corps are limited to 100 shareholders who may not be partners in the company. C corps have unlimited freedom in the number of shareholders they can have and the relationship those shareholders have with the company. To put it simply, S corps are for smaller businesses that wish to remain small, and C corps are for those that want to grow as large as humanly possible. Running both S and C corps involves greater responsibility than running an LLC or a partnership. Corporations require by-laws, regular board meetings, and the maintenance of a leadership apparatus for the business. Don’t jump into an S or C incorporation unless you’re ready for some serious responsibilities.

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    Starting a business takes courage. There are always risks involved. Use this information to aid in your decision-making process. Protect yourself from liability, and don’t forget to consult with an attorney if your money is on the line. Best of luck entrepreneurs.