I frequently get asked what type of legal entity is the best for someone's business. There are many good choices, and the type of legal entity that you choose regarding your business can have a lot of long term effects, both from an operations standpoint, as well as from a tax-planning standpoint. While the ultimate decision comes from an in-depth analysis of the type of business you are running, the types of owners you will have, and your plans for the future of the business, below are some general differences between some of the legal entities that are available that need to be discussed:
- C-Corporations: The original limited liability entity. Very formalized, and used mostly by businesses who will have a very large amount of investors (used by most publicly traded companies), and in some instance, high growth start-ups that plan to retain their profits year after year without disbursements to their shareholders in order to build large value.
- S-Corporations: It is really just a C-Corp with a special tax election. Has extremely important restrictions on who can own the stock, and for people who want formality but want some of the flow through tax advantages of being a smaller business.
- LLC's: Originally created solely to hold real estate, but now a great option for several businesses. Has the ability to take special tax elections – even to be taxed just like an S-Corp, and very flexible to hold real estate, an operating business, or both, if properly discussed and structured.
- LLP's: Used to hold real estate and some investments, but changes in laws have created some thoughts on the fact that these are not the best entities to hold investments in and encourage people to think about transferring out of LLP's.
There are several other options that a specialized and qualified business attorney can assist you with and discuss, and choosing the exact legal entity that makes the most sense for your business plan is essential for setting you off on the right foot for success.
John W. Schuster, JD MBA is the owner of and an attorney at Caliber Law, S.C., a law firm located in Oshkosh, which specializes in helping business owners start, protect, buy, sell, and grow their businesses. To learn more about John and his practice, click here.