Setting Up Your Business For Success: Forming Your Business Entity
This blog post was written by Robert Drumm, an attorney at Van Osdol KC.
This article has been written by the law firm of Van Osdol, P.C. for the reader’s general knowledge. Please understand that nothing in this article should be taken as legal advice for any specific situation. By writing this article, Van Osdol is not intending for any attorney-client relationship to be established and is not offering legal services to the reader.
Entrepreneurs and business owners are often overwhelmed thinking about the legal consequences of setting up your business. Just like marketing, accounting, and product design, the legal form for starting a new business is another choice to make in the process.
There are three key factors that influence entrepreneurs when choosing a formal business entity, whether it be an LLC, an LLP, or a corporation.
These factors are risk management, taxation, and credibility.
Risk Management
When it comes to risk management, properly conducting your business through an entity can protect your personal assets from some creditors’ claims—both claims from the intentional creditors you contract with and the “accidental” creditors who have claims that arise through alleged negligence or alleged bad behavior. But some entrepreneurs overestimate the strength and scope of the “corporate shield” or the “corporate veil.” An understanding of the risk-management limitations of a business entity is important before entrepreneurs are faced with a contract that can’t be fulfilled and before they encounter claims for products liability, professional negligence, or worse.
Taxation
Tax benefits — and tax compliance burdens — are a major considerations when setting up an entity. A single-member LLC can be disregarded for tax purposes or treated like a corporation with a separate existence for tax purposes whereas a multi-member LLC can be treated differently — either as a partnership or a corporation. A corporation will always be treated as a corporation, which means that the taxman assumes he gets a double share: tax on the income to the corporation and additional tax on the shareholder who receives a dividend. Entrepreneurs can, if they qualify, elect to be an “S” corporation where income and gains are attributed only to shareholders, but not every business or ownership group will qualify. The process of determining the best entity form for tax efficiency used to involve some fairly simple math and a realistic view of the company’s future capital needs, but with the introduction of the Trump tax reform, and the uncertainty about its future, the tax analysis has gotten more complex.
Credibility
The entrepreneur’s final consideration in choosing an entity is the credibility factor. Longtime personal and professional acquaintances may not care if they’re signing a contract with or writing a check to “Jane Johnson” personally or Jane’s entity “Whizbang Gizmo, LLC.” In fact, they may even forget that the LLC exists. Banks and landlords usually don’t care either. They just want to make sure Jane ultimately pays, and they usually demand a personal guaranty when the LLC borrows money. Strangers, on the other hand, do care. Frankly, people perceive a business as more legitimate if it’s conducted through an LLC, and in some cases, view the business as even more legitimate if it’s a corporation.
Plus, you’ll take your own business more seriously once you’ve set it up properly.
On Tuesday, November 13, Van Osdol is coming back to Bridge Space as a part of our free legal seminar series to the community. November’s training will run through the basics of choosing and forming an entity, and we’ll spend some time discussing how an entrepreneur can use a business entity for risk management, tax efficiency, and credibility. We’ll also discuss some of the things that can go wrong.
By the time you leave, you’ll feel more confident knowing how you and your business can be protected, understanding the tax implications, and taking your business to the next level.
The post Setting Up Your Business For Success: Forming Your Business Entity appeared first on Bridge Space.
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