Business Formation

From the moment you begin any business activity, you can potentially be exposed to the debts and liabilities of that business.  But choosing the right business entity and formally registering your company can help limit your personal exposure. Priori is committed to helping you find the right lawyer to help you form your business.

Significant advantages can be conferred when you decide to formally register your business:

Limited Liability. Establishing a separate entity for your business creates a legal distinction between the individual owners and the business itself. This separation shields owners from liabilities arising from the debts and other issues of the business.

Tax Benefits. Choosing the proper entity form and tax structure for your business can mean significant savings.

Reputation. Doing business as a legal entity legitimizes your business from the perspective of key stakeholders and third parties including customers, vendors, investors and others.

In order to create a business entity, you’ll need to file appropriate legal documents, pay required filing fees and, in some cases, meet additional “publicity” requirements. Such requirements vary based on the type of business formation you choose, as well as the state in which you form your new entity.

A C Corp is a legal entity that formally separates owners (the shareholders) from the corporation, such that shareholders are not personally liable for the debts or liabilities of the corporation. C Corps are subject to “double taxation,” meaning the corporation is taxed on its net income, and shareholders are also taxed when the profits are distributed. If you plan to raise outside investment or have aspirations to take your company public, then a C Corp is traditionally the right entity form.

An S Corp is formed by filing for special tax status with the IRS. S Corp status provides pass through taxation, which means there is no tax at the corporate level, only when profits are distributed to shareholders. This tax-status causes significant limitations on who may be a shareholder, the number of shareholders and the stock classes.

An LLC combines the limited liability of a corporation with tax efficiency (i.e. no double taxation) and operational flexibility. The tax benefits and greater flexibility as compared to corporations, is not without limitations: tax and accounting complexity, unattractive for outside investors and limitations on capital structure.

A sole proprietorship isn’t a separate legal entity at all; rather, it is an unincorporated business run by one person. Because forming a sole proprietorship requires no formal action, it is the simplest and least expensive of business form. Sole proprietorship status automatically results from conducting business activities but creates no legal separation between you and your business. In a sole proprietorship, you are personally liable for all activities of the business: all expenses and debts of the business are yours and so are the tax obligations.

A general partnership is an association of two or more people conducting a business as co-owners. General partnerships can be formed by entering into a partnership agreement or by default when two or more partners act in concert. The partnership functions as a separate entity, but the liability of each partner is unlimited, both with respect to his own acts as well as acts of other partners.

A Limited Partnership is a variation on the general partnership. The entity consists of a combination of general partners, who manage the business and take on liability, and limited partners, who usually contribute capital, but only have limited liability. Unlike an LLC, there must be at least one managing partner who bears liability for the partnership’s actions.

When your company’s mission will be to support a charitable cause, you’ll want to consider forming a nonprofit corporation. To receive all the benefits--obtain private and public grants, low-cost postage rates, exemptions from income, sales and property taxes, and the ability to receive tax-free donations--a nonprofit must be registered with its state of operation and file for (501(c)(3)) tax-exempt status with the Internal Revenue Service. Every 501(c)(3) organization is classified as either a public charity or a private foundation, depending primarily on the level of public involvement. A private foundation is typically funded and managed by its own trustees or directors, while a public charity derives its funding from the general public.

If you are an aspiring social entrepreneur with a new business idea or an existing charity that needs a for-profit subsidiary, there are newer entities to choose from. These include Public Benefit Corporations and Low-Profit Limited Liability Companies.

Choosing the Right Business Form

Choosing the right business form is one of the first in a series of critical decisions that will dramatically impact your business in both the short and long term. The right business form can reduce exposure to liabilities, confer the maximum tax advantages and ease the process of financing and running your company. Enlisting a lawyer will relieve the burden of organizing the necessary documents and filing with the proper state and federal authorities, and also ensure you choose the right form the first time. This will save you money and time, so you can do what matters most: run your business.

 

C Corp

S Corp

LLC

Limited Liability

Yes

Yes

Yes

Double Taxation

Yes

No

No

Simplicity/Low Cost

Yes

Yes

No

Restrictions on Distributions of Profits

Yes

Yes

No

Tax Break for Gains on Qualified Small Business Stock

Yes

No

No

Management Flexibility

No

No

Yes

Limitations on Eligibility for Ownership Stake

No

Yes

No

Limitations on Capital Structure

No

Yes

No

Immediate Ability to Take Public

Yes

No

No

Flexible Organizing Documents

No

No

Yes

Availability of Tax Free Corporate Acquisition Provisions

Yes

Yes

No

Ability to Have Multiple Classes of Stock

Yes

No

No

Step-up in Tax Basis from Undistributed Earnings

No

Yes

Yes

 

Costs

The legal costs to form a business vary, ranging from $350 for a single owner corporation or LLC to $15,000 for hedge fund or private equity fund formation. Schedule a consultation with a Priori lawyer today to get an estimate of how much your particular company will cost to form, including legal costs and filing and publication fees.

FAQ

Q: When should I form my company?
A: It’s important to speak with a lawyer early about forming your company, as the circumstances of each individual case will affect proper timing.

Q: Which entity should I choose for my company?
A: Generally, operating as a C-corporation is the best route if you aim to take on investment, and ultimately go public. If you have other goals for your business, other business forms may be better suited to you. You should consult a lawyer about the best entity for your company.

Q: Where should I form my business?
A: If you are planning on seeking venture capital, Delaware’s extensive body of corporate law make it a popular state for incorporation. However, there are other considerations that might make forming your business elsewhere more desireable. A lawyer can advise you on the best state to incorporate in given your business and goals.

Legal Worksheets & Checklists

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