Choice of Jurisdiction:

When choosing a jurisdiction in which to form your new business it is important to understand that the laws governing entity formation and fillings are jurisdictional and vary by state. When choosing a state or jurisdiction to incorporate, you must consider amongst other things: where you are located, where will be doing businesses, what type of business you will be doing and which jurisdiction has favorable laws. Note that you must still register in each state and jurisdiction that you conduct business in regardless of which state you choose for formation. Delaware, Colorado, Wyoming, and Florida are often considered preferred states or jurisdictions for forming a business for different legal and tax liability reasons. Many however ultimately prefer to choose their own home state.

 

Choice of Entity:

When choosing the right type of entity for your business the following key items along with other considerations are critical: managing tax liability, limiting legal liability, ownership structure & control, types of operation, location of operations, exit strategies, and inheritance. Remember limitations to liability are strongest when the organization is run ethically and properly. Otherwise courts may “pierce the corporate veil” and hold individuals personally liable. Using best practices and conducting business ethically is the best liability protection. The following is a brief synopsis of the most popular entity types:

 

C Corporation:

A C corporation is the basic and standard operating company. There are not restrictions on the number of owners, the types and classifications of owners or the types of owners. A stockholder is limited in liability by the amount of stock that is held. A C corporation is a standalone company for tax purposes. C corporations may be subject to double taxation. This means profits are taxed as income to the company and distributions to stockholders are taxed as income to the stockholders/owners. However, there are a number of simple ways for small privately held corporations to avoid double taxation.

 

S Corporation:

S corporations were designed to help smaller companies. Because the S corporation privileges have been abused by larger corporations they often are more heavily scrutinized then other entities. S corporations allow for pass-through taxation, thus avoiding the double taxation issue of C corporations. However, S corporations have limitations on the number of stock holders (holders must be US residents) and type of stockholders.

 

Limited Liability Company (LLC):

An LLC allows for limiting liability and allows you to choose the tax structure. This means you can opt to be taxed as a C corporation, S corporation, Partnership or Sole Proprietor. Because most standard LLCs have built-in buy-sell clauses in their Articles of Operation at the time of formation, exit strategy planning is often easier for this entity type.

If properly structured, an LLC’s owners have both a corporation-style liability shield even if they participate in the business. Therefore, owners of an LLC have maximum freedom to determine the internal structure and operation of the LLC.

If an organization is going to have operations in several states and wants to keep each location as a separate company, it may consider the option of serial LLCs, which are recognized in Delaware, Iowa, Oklahoma, Illinois, Tennessee, Utah,
Wisconsin, and Texas.

 

Professional Limited Liability Company (PLLC):

This entity type is reserved for licensed professionals such as doctors and lawyers. Members and managing members must be licensed professionals.

 

Partnerships:

You must have a minimum of two or more persons in a business for profit to qualify for a partnership. A corporation, organization, estate, trust, partnership, or any other legal entity can act as a partner in a partnership. A general partnership is a flow-through conduit for both taxation and limitation of liability. All partners of a general partnership are liable for all debts and obligations of the partnership. Because of the flexibility of managing a partnership, most partners will want to have a written agreement that may end up being a complex document.

 

Limited liability partnership (LLP):

An LLP allows partners to substantially limited their liability. Unlike partners in a general partnership, who are liable for all partnership obligations, partners in a limited liability partnership are not personally liable for partnership obligations unless the obligations are attributable to the fault of the partner. LLPs are a flow-through entities that do not pay federal income tax.

Not all states permit all types of professionals to have limited liability for professional malpractice. Some states have extra requirements for LLPs such as holding a minimum amount of liability insurance.

Lastly, some companies may want to consider possible franchise taxes: Alabama, Kentucky, New York, Pennsylvania, Tennessee and Texas have franchise taxes which may be an important factor if creating a franchise is in the future plans of your business