Small business veterans may differ on politics, taxes, management styles and even on business models. But one thing they generally agree on is this: the business world is a dangerous place.
In business, there is potential trouble literally everywhere –contracts, product liabilities, employee problems, intellectual property mistakes, etc. - clogging our courts with litigation and costing small business billions of dollars. Too often, those costs reach beyond just the business world and find the pocket of unwary entrepreneurs that failed to grasp the value of protecting themselves by incorporating. But choosing the right type of business entity to gain the protection you need can be a real challenge.
Incorporation, first and foremost, protects the individual from the risks of business. It creates a legal layer between the business liabilities and the owner’s assets.
The decision to incorporate is often driven by federal tax issues, without consideration to the value of the personal protection that incorporation offers from the risks of business. The value of personal protection should trump the break-even analysis that bean counters often apply to the cost of incorporation. The commonly held view that incorporation should only be considered after a business reaches a certain level of revenue is dangerously shortsighted, and usually wrong.
In our litigious business world, the best time to incorporate may be before you start business; before you sign contracts, hire employees, purchase or lease assets, service customers, sell product or borrow money. Incorporating after doing any of these things means those pre-incorporation activities leaves the individual personally liable.
Making the right decision in choosing the best business entity for you requires planning, and possibly the advice of a legal, accounting or incorporation professional. The bowl of business entities contains alphabet soup: there are LLCs, C corporations, S corporations, LPs, LLPs, and even LLLPs. Each has subtle differences that make them preferable in specific circumstances.
Here are eleven questions that will help you decide which type of business entity is right for you:
1. Where will the business be conducted? Because different states offer varying degrees of personal protection, a Nevada entity may be the best choice, regardless of where your business is conducted.
2. Who will own the business? If the owner(s) will be other business entities or foreign citizens, using some entities won’t be an option.
3. How many owners will there be? Again, some entities have limits.
4. Where will you get the capital? If it is borrowed, you might want to use an entity that allows owners to include the debt in their tax basis.
5. Will the business need to retain significant earnings for future needs? Accumulated earnings will generate a huge tax bill for the owners of some entities, but not for others.
6. Do the owners want pass-through taxation? Pass-through taxation eliminates the double taxation of profit distribution to owners, and allows losses to flow through to offset other income of the individual.
7. Will the first few years of business generate net losses? If so, the owners may want them passed through as described above.
8. Do the owners want or need to create different classes of ownership? Some entities allow this, some don’t.
9. Are the owners concerned about protecting their business from liabilities associated with the other owners? Some types of business entity provide this protection, while others don’t.
10. Do the owners intend to offer employee benefits (health insurance, profit sharing or cafeteria plans) to owners? A C corporation can have some advantages if that is the case.
11. Is the business regulated or subject to special licensing requirements? Some types of regulated business activity may not be able to use certain types of business entities.
Every Nevada business entity is required by statute to maintain a registered agent in the State to receive legal service of process. Since service of process received by an agent can result in binding consequences for your company, make sure your agent is a company that abides by the professional ethical standards of the Nevada Registered Agent Association.
