Business Entity Formation

Picking the right entity for your business can be critical

Any lawyer can form a corporation or other entity, but entrepreneurs are well-advised to hire legal counsel who has extensive experience in this area. There are many types of business entities, among them partnerships, corporations, and limited liability companies (LLC’s), and picking the right entity can be critical. Make the wrong choice, and the consequences can range from annoying to dire.

If there is one owner, the principal choices are sole proprietorship (which technically is not a type of entity), corporation, or LLC.

If there is more than one owner, the principal choices are partnership (either a general partnership or a limited partnership), corporation, or LLC.

In determining which form of entity to choose, several factors should be considered:

Limitation of Liability on the owners.

For an entity that is not a limited liability entity, the owner (or owners) is fully liable for the obligations of the business, even if the owner has not committed to contribute to it in the future. The owners of sole proprietorships and partnerships do not enjoy limited liability for the obligations of the business.

Tax Consequences to the owners.

One of the most significant tax aspects is whether the business is a “flow-through” entity, whereby income of the business flows through to the owners of the business for tax purposes, and each owner pays income tax on their share of the business’s income.

Eligibility Restrictions

Not every form of business organization is available for every kind of business. Because of regulatory restrictions, some businesses can be operated only in corporate or partnership form (or as sole proprietorships). For example, an LLC is not eligible to operate certain kinds of business in Michigan such as a non-profit corporation. In other cases, only a corporation is permitted to operate certain types of businesses. These regulatory constraints must be taken into account in choosing the right form of entity.

Control of the Company

One of the most important issues to owners of businesses is control. Control can be more easily and flexibly allocated in a non-corporate form, such as a partnership or LLC. Nonetheless, knowledgeable counsel can achieve much of the desired flexibility in corporate form, though typically the legal fees are higher since the corporate form is less flexible and requires more legal work to achieve the desired flexibility.

Getting Started Right

Contact us today to speak with an experienced business entity formation attorney. We help entrepreneurs have the assurance of knowing that he or she has the assistance of experienced counsel in forming a business entity.

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