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Business Entities: Which is Best for You?
Here, business and corporate attorney Joseph L. Kroart III discusses the differences between the various business entities.
In her spare time, my wife enjoys restoring and refinishing old furniture for friends and others. She sometimes talks about one day giving up her career and scaling up her hobby, which would involve finding a brick-and-mortar location to open and operate a small business. Her dream of starting a business will have to wait until our children have grown, but perhaps you’re ready to start a business now.
If you are, one of the first questions you should consider is what sort of business entity will best fit your needs. There is no simple answer to this question. Rather, the type of entity should be chosen based on a number of variables particular to your desired business. How many individuals will be involved in owning and managing your business? How will it be financed? What is its potential for growth? Careful consideration of these questions, among others, will help you to determine which business entity may work best for you. Let’s take a quick look at some of the common entity forms that are available to you.
A sole proprietorship is as simple a business entity as there is. It consists of a single individual who controls the management of the business. The simplicity of this form is found in its formation as well, for aside from any licenses required to conduct business, Maryland law does not require sole proprietorships to register as a business entity or file annual reports. The downside of this entity though is that sole proprietors can be held personally liable for the financial and legal liabilities of their business.
Another common business entity is a general partnership, which involves two or more individuals operating together with the intent to make and share profits. Like sole proprietorships, general partnerships are simple to form: under Maryland law, two or more individuals acting together in a business for profit will be recognized as a partnership whether or not the individuals intend to create a partnership or refer to themselves as partners. Unfortunately, like sole proprietorships, general partnerships do not provide any shield from personal liability. Each general partner is subject to unlimited personal liability related to the actions and obligations of the partnership. An effective partnership is one that is governed by a partnership agreement, which establishes guidelines for the partners regarding the operation of the business. A partnership agreement may be oral, but ideally should be in writing and prepared by legal counsel. Also, a general partnership can register in Maryland as a limited liability partnership (or “LLP”). An LLP functions in the same manner as a general partnership, but a general partner is normally not held personally liable for the business obligations of the partnership.
Certain partnerships provide a shield against personal liability. A limited partnership is a type of partnership in which there are one or more general partners who are personally liable for the business obligations and one or more limited partners (or “silent” partners) who do not engage in the management of the partnership, but whose liability extends only to the limit of their financial contributions.
Incorporating a business is yet another option. Many people think of corporations as being only very large operations, but that’s not always the case. For instance, in Maryland (and in many other states), businesses may be formed as “close” corporations, which generally tend to be smaller and allow a limited number of stockholders to control the management of the corporation. Close corporations—as do all corporations—allow for centralized management of the business affairs while providing limited liability protections for the stockholders. Forming a corporation requires filing “Articles of Incorporation” with the Maryland State Department of Assessments and Taxation. Subsequently, annual records must be kept and reports filed. Also, depending on the type of corporation created, there are significant income tax implications to consider. C Corporations are subject to double taxation: profits are taxed at the corporate level, and then any after-tax distributions to shareholders are taxed as well. However, if S Corporation status is elected, the corporation’s income is taxable only at the stockholder level.
Limited Liability Companies
Although incorporating was once the preferred choice for small businesses, limited liability companies (or “LLCs”) are now the most popular alternative for business entity formation. An LLC may be owned by a sole individual (or “member”) or may have multiple members. Like corporations, LLCs provide the benefit of limited liability for their members. However, LLCs do not require the more rigid central management structure that corporations do. Rather, members of an LLC have the flexibility to manage the business operations in any manner that they deem fit. LLCs provide great flexibility for income tax purposes. In Maryland, LLCs are formed by filing “Articles of Organization.” Finally, like a corporation, an LLC can exist in perpetuity.
Consult the Business Attorneys at Adelberg Rudow to Learn More About the Right Business Entity for Your Business
There is no “cookie cutter” answer to the question of which entity is right for your aspiring business pursuits. However, careful consideration of the various factors combined with consultation with a business law attorney will help you to get your business off the ground with the proper protections and the right management structure.
It is vital for business owners and entrepreneurs to have a reputable legal team that is well informed on business entities. The business attorneys at Adelberg Rudow have decades of experience counseling their clients in choosing appropriate business structures for their specific needs and guiding their clients through entity formation. To learn more about how the business attorneys at Adelberg Rudow can help you with business formation and other business-related legal matters, contact them today.
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