| Choosing an ownership structure for your new | | | | liability protection advantage. Although I compared an |
| business is really not as hard as extracting your | | | | LLC to a partnership, it is possible to form an LLC with |
| wisdom tooth on your own. If you file taxes yourself, | | | | just one member to take advantage of the limited |
| you are probably well equipped to do this without a | | | | liability protection. |
| lawyer or an accountant. Remember, you can always | | | | Corporation |
| choose to convert to another form of ownership later. | | | | There are two types of corporations: a C Corporation |
| To begin, let's examine the four types of ownerships | | | | and an S Corporation. A C Corp offers the same |
| you can choose from: | | | | limited liability protection that LLC offers. Most publicly |
| Sole Proprietorship | | | | traded companies are formed as C Corporations |
| When I read about another tort case in the news, it | | | | because this ownership structure has been around for |
| often reminds me of the word "extortion". Granted, not | | | | a long time. The regulations governing C corporations |
| all tort cases are frivolous, there is still room for | | | | have matured and therefore well understood by many. |
| improvement in tort law. Like everyone else, I work | | | | Despite its popularity, a C corporation has its |
| hard to earn a living. In the process, I hope to | | | | drawbacks. One that stands out is its double taxation. |
| accumulate some assets in my lifetime. I'd hate to lose | | | | That is, your corporation is taxed once at the |
| everything in a lawsuit. When you run your business as | | | | corporation level and a second time when wages are |
| a sole proprietorship, you are risking all your assets. | | | | paid to you. Yuck! |
| That's a good enough reason for me not to choose | | | | Tired of paying so much tax, the rich businessmen |
| the sole proprietorship. | | | | came up with the idea of an S Corporation. Someone |
| Partnership | | | | once said "Tax laws are written by the rich for the |
| But if you have a partner, which most startups do, sole | | | | poor." Indeed. The S Corporation is, as you might have |
| proprietorship is out of the question. For multiple-owner | | | | guessed, a C Corporation with the pass-through tax |
| businesses, a partnership offers the ease of formation | | | | advantage. Since I hate paying too much taxes as |
| much like a sole proprietorship and pass-through | | | | well, I thought a C corporation is not such a good idea. |
| taxation (there is no tax at the partnership level). | | | | Deciding Between LLC And S Corp |
| However, partners in a partnership are liable for each | | | | Since both LLC and S Corporation provide the same |
| others' actions. A limited partnership affords invested | | | | liability protection, the decision boils down to several |
| capital protection for the limited partners, but the | | | | points to consider: |
| general partner, who manages day-to-day operations | | | | |
| of the business, is liable for all actions. If you work for | | | | 1. Tax implications |
| your business, you are a general partner. Hence, a | | | | 2. Registration and maintenance costs |
| partnership structure still does not offer the limited | | | | 3. Compliance |
| liability I'm seeking. | | | | 4. Employees and future ownership changes |
| Limited Liability Company (LLC) | | | | Before I brush off liability protection altogether, it is |
| This brings us to the next ownership structure: a limited | | | | important to bear in mind that your personal assets are |
| liability company (LLC). An LLC is like a souped-up | | | | only protected if you have conducted your business |
| partnership. It has the pass-through taxation | | | | within legal boundaries. If you sell drugs, commit fraud |
| advantages of a partnership plus, as its name implies, | | | | or worse deliver spam to my e-mail, not only your |
| limited liability for its members (owners of LLCs are | | | | personal assets are on the line, I will personally come |
| called "members"). The major difference between an | | | | after your firstborn. |
| LLC and a partnership is that an LLC is legally | | | | In my next post, I will discuss the tax implications of |
| recognized as a separate entity, hence the limited | | | | choosing an LLC and a corporation. Stay tuned! |