What Legal Entity Is Right For Me

What Legal Entity Is Right for Me?

There are several different types of legal entities for you to consider using:

  • C-Corporation
  • S-Corporation
  • B-Corporation
  • Limited Liability Company (LLC)
  • Partnership (general, limited, limited liability, etc.)
  • Not-for-profit/nonprofit corporation

However, unless you plan to go public or otherwise want to raise funds from large investors who prefer the corporate structure, or you want to set up a 501(c)(3) non-profit, it typically makes sense to form an LLC and simply elect to be taxed however you want.

You see, the I.R.S. does not recognize the limited liability company as a taxable entity. (I once had an I.R.S. agent yell at me, “Stop saying LLC!”) By default, when you obtain an EIN for your LLC, the I.R.S. will disregard the LLC altogether if there is only one owner (called a “member”) of the LLC, or if you live in a community property state and own it with your spouse. The I.R.S. will treat you as a “sole proprietor” and all of your business income and expenses will be reported on your personal tax return, typically using a Schedule C. If you and one or more other people (not including your spouse in a community property state, unless you expressly want to each own your share of the company as separate property) form an LLC, by default the I.R.S. will treat you as a partnership, and you will be expected to file a partnership return for the LLC, separate from your own personal tax return.

Any LLC can elect to be taxed as a corporation by filing with the I.R.S. Form 8832. Under the new tax law, certain business owners can minimize their taxes by being taxed as a C-corporation. But, for most business owners, following Form 8832 with Form 2553--Election by a Small Business Corporation (to be taxed under subchapter S)--makes the most sense. Being taxed as an “S-corp” can help you minimize your tax burden, including significantly reducing your self-employment (payroll) taxes.

Partnerships are rarely used these days as it is much easier to use an LLC. However, sometimes a partnership is required; in such cases, it is important that it is structured correctly, which often means using an LLC to serve as the General Partner.

We can help you get set up correctly from the start, so you know that you are ready to focus on making your company successful.

Call 609-208-0999 or contact us online to schedule a consultation. Not only has he been a small business owner, he has nearly 15 years of experience as a business transactional attorney serving closely-held business owners as their “virtual in-house counsel.” He has helped clients handle things such as mergers and acquisitions, joint ventures, asset sales and purchases, stock transfers, business entity formations, equity-owner agreements with “buy-sell” provisions, commercial leases, employee “phantom stock” plans, and general contract drafting and review. Ely also advises clients regarding asset protection and their overall tax and estate planning goals.