Deciding On The Best Business Entity
The choices for business entities are expanding, often making it confusing to decide what kind of business entity is right for you. The choices include: Sole Proprietorship, Corporation, General Partnership, Limited Partnership, Limited Liability Company, along with numerous choices for structuring these entities. An informed decision of which entity is best for your business involves an evaluation of numerous legal as well as other factors. You may know, for instance, that a corporation affords your business certain protections from liability which you would not have as a sole proprietorship. To take advantage of this protection, it is necessary to maintain the corporate entity. Obviously, this is a more expensive task than maintaining a sole proprietorship. It is necessary however if your goal is to obtain liability protection. Liability protection is more important for some business than for others. The nature of your business, therefore, is one of the factors that must be evaluated in determining the best business entity for your business. Assuming you decided to incorporate, you must then determine whether or not to be a C or Sub-S corporation this boils down to tax considerations. You should work together with your lawyer and accountant in deciding whether to incorporate, and if so whether to become a C or Sub-S corporation. If you incorporate and if you have other shareholders, then you must also consider the need for Shareholders Agreements, including By-Sell Agreements, so that if one of the shareholders decides to sell, the selling shareholder will first need to offer his shares to the remaining shareholders. This protects the remaining shareholders against having to be in business with a stranger. Provisions also need to be included for determining the price of the shares and for dealing with the death or disability of a shareholder. Whenever there is more than one business person involved, you should work with your attorney to draft documentation to deal with potential conflicts among the partners, employment agreements, non-compete agreements and other important concerns. If you have an employment agreement you may want to provide, for instance, that an employment agreement of a shareholder shall automatically terminate when that shareholder sells all of his shares or a certain percentage of them. Again, the specific decisions you make concerning these items should be based on the particularized nature of your business.
Partnerships, whether they are limited or general, by definition involve more than one business person. The same types of considerations apply to partnerships. Whenever there is more than one business person involved, you must think about potential conflicts and how they should be resolved. In the beginning of a business relationship, everything seems fine. That is the time to address future potential concerns, not when they actually occur. It is much less costly to address these issues up front when the parties desire to enter into a business relationship and can think clearly about how they perceive that relationship than it is to argue about them later. Often times these ‘formalities’ get over looked in light of the party’s optimism and excitement over the potential of the business. This is a mistake. The time to address these matters is before they become actual disagreements.
Whether to choose a general partnership, a limited partnership or an LLC, like the decision whether or not to incorporate, involves a careful analysis of the operations and concerns of your particular business. Do not rely on the advice of friends or relatives. Seek the help of an attorney who can help you draft these documents and help protect you against potential significant legal problems in the future.