Dear M & M: How do I know what the right legal entity for my business should be? – Janice

Dear Janice: Every business needs to choose a legal entity for your business before you can even start it. A legal entity dictates asset protection, estate planning and how your business will be taxed. Other considerations should be the burden to become and maintain.

Some of these burdens can be time considerations as well as monetary. There rarely is one best solution for all business. Each situation or business needs to consider what is right for them. Conversations with qualified accountants and lawyers need to take place.

Generally, there are three types of legal entities most businesses choose; sole proprietor, partnership or corporation. Starting a business as a sole proprietor is fast and inexpensive. There is no asset protection, no tax advantages nor are there any estate planning advantages in a sole proprietorship. Insurances can be bought, good accounting advice and practices can implement procedures to take advantage of legal deductions available to a sole proprietorship.

A second legal entity is called a partnership. There are several types of partnerships to include general and limited liability partnerships. One can elect to be taxed differently in some instances. Partners can limit their liability in some partnerships, hence the name “limited liability partnership”.

Finally, one can choose to be a corporation. Probably the most popular corporation is called a Limited Liability Company (LLC). An LLC does exactly that, limits liability (with exceptions). A corporation can elect to be taxed as an (S) Corp and can infer tax savings as revenue gets reported on individual returns, usually taxed at a lower rate than a corporation. There are some benefits to reducing the amount paid into payroll taxes by the owners of the company in an (S) Corporation. Make certain you get some good advice on choosing what legal entity is right for you from someone that has experience and is familiar with the time to maintain, costs to become, tax considerations and the liability or risks taken on from each choice.

One can always change from one legal entity to another. You are not stuck with the first one you choose. With that being said, you should start out with the legal entity that is right for you at the time you decide to go into business.

One should have a complete understanding of the management burdens and your willingness to take on the responsibilities each entity dictates.

In summary, get some professional advice in helping you to choose what legal entity you should become.

ASK M&M is prepared and submitted by Mark Schmitt, director of the Small Business Development Center at Cochise College; and Mignonne Hollis, executive director at the Arizona Economic Development Foundation. To ask your questions: Call the Small Business Development Center (SBDC) at Cochise College (520) 515-5478 or email schmittm@cochise.edu or contact the Arizona Regional’ Economic Development Foundation at (520) 458-6948 or email hollism@aredf.org; www.aredf.org.

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