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What Business Structure is Best for You?
Here is a synopsis of the factors I will use when
advising you on choosing between the various business formats. As you can see,
there is no perfect choice, and one of our goals in the attorney-client
relationship is to line up your priorities to make the best choice from
imperfect alternatives.
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Simplicity:
Don't unnecessarily complicate your business life if you don't have
to. Sometimes the business can be run as a sole proprietorship
with no significant adverse consequences. Other business relationships
can be a matter of contract, such as joint ventures.
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Management
Structure: The best business structure from the management
perspective is the C Corporation. Also, this is the business
format with the most tax-deductible benefits such as employee benefit,
retirement, group insurance, etc. programs.
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Taxes:
You need to avoid "double taxation" if at all possible. The C
Corporation, unfortunately, is most vulnerable to this. Double
taxation results when you cannot pay out all the profits as expenses under
I.R.S. rules. These profits are then taxed to the corporation.
If the profits are also paid out to the shareholders, this is a dividend
which is taxable to the shareholders but NOT deductible to the
corporation. Hence, double taxation. The S Corporation, Partnership,
and Limited Liability Company are business formats that pass through
all profits to the individual tax returns of the owners and thus avoid
double taxation. Another tax issue is FICA (social security) and
Medicaid taxes, that apply to wages but not dividends.
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Personal
Liability: This is diminishing in importance for small companies
with only a few owners. The Courts are increasingly imposing personal liability
on the owners when the assets of the business are insufficient to pay debts
or liabilities. This means you can't count on a corporation, for
example, shielding you from personal liability. Insurance is the
answer here. However, corporate or equivalent ownership can reach the
point in terms of numbers of shareholders, size, and assets, where the
"corporate veil" is respected by the Courts, so this remains a
relevant long-term planning consideration for growing businesses, especially
those going public some day.
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Profit or
Non-Profit: Some businesses run better as a non-profit, especially
if they want to be a charitable organization eligible for tax-deductible
contributions.
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Going Public:
If going public is a realistic possibility, we will want to take that into
consideration, not only in choosing among business formats, but also in the
precise manner we implement the chosen format.
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Asset Ownership:
Some assets, such as real estate, should NEVER be owned in corporate form of
any kind unless there is an overriding special reason to do so. Tax
rules end up penalizing corporate ownership of such assets in almost every
case.
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Multiple Formats:
I'm turning to this more and more. Often, the operating company should
be a C Corporation, but the business assets should be held in another
format. We will discuss this in appropriate cases.
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Family and
Estate Considerations: In all cases we must make sure that the
legal and practical aspects of the business format is compatible with the
family and estate needs of the owners. Often, we will have an
agreement of some kind to regulate what happens when one of the owners or
investors dies, becomes incapacitated, etc.
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What State to
Use: As a rule, it makes sense to form the business in the state
where the bulk of the investors live or where the main business location
is. There are exceptions and we will look at these. Colorado is
a decent state in which to form a business entity so there is typically no
need to form a Colorado-based business under the laws of another
state. Importantly, all states with state income taxes will want to
tax the income of the business derived from activities in that state when
the business has an actual physical presence in that state.
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Cost:
The more intricate the business format or multiple formats, the more
expensive the business is to run from that standpoint.
I don't recommend a
do-it-yourself approach to determining the business format. There is
little room for error, and undoing error can cost more than doing it right in
the first place. Some aspects of business formation are a one-way street,
so undoing the wrong choice can even result in paying unnecessary taxes.
Also, the state forms for some business forms are inadequate and their use can
cause unintended problems. Finally, to have your business entity accepted
for what it is requires you to take all steps to operating that business as it
should be. For example, merely filing Articles of Incorporation for a
corporation does not mean the business will be accepted as such.
I generally charge
modest fixed rates for business formations involving only a few shareholders and
typical formation circumstances. My usual rate in this regard is $750
including the filing fees and cost of obtaining share certificates and seal -
these costs usually amount to about $125 so the actual legal fee is only about
$625. Extra services, such as shareholder agreements dealing with death,
disability, etc., do add additional moderate costs. I will tell you the
actual fees applicable to your situation before you incur them. I don't
charge you fees until we are ready to go, so you can call me at 303-740-2231 and
go over the basics with me without concern over incurring a fee. Also, if
you want, you can Contact Me by email from this Web
site.
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