Which Corporate Structure is Best?
So you want to start a business and find out there's all sorts of business structures out there. Let's clear the confusion and review the pros and cons so you can find the best fit for you:
1) Sole Proprietorship. This is the simplest and easiest, and is best for an individual or a couple (Husband and Wife) with employees. No set up required and business income is reported on your personal tax return. This is not a great option if you have a lot of contracts with landlords, vendors, subcontractors, supplies, etc. From a liability standpoint, this is a weak option because it's not legally separate from your business. What does that mean? It means your bank accounts, house, and cars, etc. are at risk if your business gets sued.
2) General Partnership. This is the default. A business with two+ owners that hasn't established an entity is automatically treated as this. General partners often share in it all - the management, and the profits and losses. Just like sole proprietorships, a general partnership doesn't offer a shield to its partners from lawsuits, including liability for partners' negligence or misconduct.
3) Limited Partnership. Two tiered system. Top tier includes at least one general partner who is actively operating the business and as such is personally liable for the business's obligations. Second tier includes at least one limited partner who isn't involved in running the business. The limited partner shares in the profits but their liability is limited to the amount invested in the business. This is often chosen when you have outside investors who aren’t involved in the day-to-day business operations. However, an LLC, as discussed below, is a better choice because it offers limited liability in addition to management.
4) Limited Liability Partnership. This is similar to a general partnership, but the partners are protected from responsibility for the other partners’ negligence.
5) Limited Liability Company. The popular choice! The flexibility, limited liability protection, as well as the fewer recordkeeping, meeting, and reporting requirements compared to other corporations is what makes this attractive. This structure provides its owners/members with protection against liability. So, let's say your LLC can’t pay its debts or obligations, only the business assets (not the members’ personal assets) are at risk. Of course, it doesn't insulate members from their own personal negligence or wrongdoing. From a tax standpoint, LLCs are flexible in that they can elect how they want to be taxed: as a sole proprietorship or partnership, or as a corporation. LLCs can be managed by their members, or by people designated as managers. Further, an LLC can have one member or many. But this is not the preferred choice if you aim for venture capitalism, angel investors, or to become a publicly-traded company.
6) Corporation. Offers owners/shareholders the same liability protection as LLCs but tend to have more complex recordkeeping and reporting requirements than LLCs. As far as taxes go, corporations can be taxed as C corporations or S corporations. Best to visit with an accountant so they can advise you on the most advantageous tax status for your business.
7) Nonprofit Corporation. Is your business designed to help others or support a cause rather than to make a profit? Then this may be the way to go. Nonprofit corporations have the same liability protection as for-profit corporations. To get tax-exempt status from the Internal Revenue Service, you must apply. Further, you must use profits toward managing your business/charity and not pay proceeds to shareholders - hence, it's name "not for profit". **Keegan Law LLC has successfully achieved IRS non-profit status for our clients.**
With the exception of sole proprietorships and general partnerships, you’ll need to file paperwork with the state to establish your business entity.
In Hawaii: Business Registration (hawaii.gov)
That's where Keegan Law LLC can help! We can prepare the partnership agreement (a.k.a bylaws) that addresses how your business will make decisions, accept new owners, resolve disputes and deal with departing owners, along with all the other necessary paperwork to save you money and stress in the future.
May 5, 2021
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