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Which
Entity is Best for Your Business?
There are many factors to consider when starting
a new business or expanding. Two key factors are what entity should
you consider to maximize your businesses’ results and should
you consider a partner in your new business?
Unfortunately, the information that is available
on the advantages and disadvantages does not support you in making
a decision as to what will be best in your situation, it only
gives you choices. This leads to making a decision based upon
2 or 3 factors, which may later turn out to be the wrong choice.
One of our goals at Nevada Corporate Planners,
Inc. is to provide you with the next step, the solution as to
what may be the best entity for your situation. It is our unique
process that we developed after researching this subject inside
and out. Please avoid companies or information that recommend
that one entity is best for most situations. It is quite common
for many Nevada companies to promote C corporations over 90% of
the time. Why? When you have only one main choice, it becomes
easier to sell because you do not confuse the prospect with choices!
This is very unfortunate. This information we have provided for
you will give you some insight to what is part of the thought
process to determine what is the best entity for you.
- Choice of Entity?
- Should you be an S corporation, C corporation
or LLC?
1. How are they taxed from a federal point
of view? From a state point of view? Sometimes an entity
may be the best choice from a federal point of view, and that
best entity may change to another choice when examining the
state factors! Like an LLC for federal then getting into Texas
and realizing for running a business that an LP may be better.
But if just holding assets with a small annual revenue is
a priority then an LLC may turn out to be the best choice.
- What about having to transfer assets into
the new entity, what are the tax ramifications of that?
- What about having to borrow money in this
new entity, then which one is better?
- Will this new entity own appreciating assets?
- If a partner is involved will there be problems
with capitalization?
- Are there any challenges with a personal
service corporation? Personal holding corporation?
2. Choice of entity from a liability
point of view? All may be the same from an entity level point
of view? What about from an individual owner level? Do you need
the extra protection that partnership taxation affords because
of the charging order protection?
- Do you need more than one entity to protect
valuable assets from a direct business lawsuit?
3. Should you have a partner?
a. The advantages:
- Allows you access to additional experience
that you do not have and to pay a salary to because they
are an owner like you.
- They may bring capital to the table that
you need.
- They will be there for support with important
decisions.
- You will have a teammate to be there with
you when you are burning the midnight oil.
- You may be able to double your efforts
in getting the company started much faster then if you just
did it alone.
- You now have the option of partnership
taxation that has tremendous advantages:
- Being able to contribute assets tax-free
and distribute assets tax free-IRC 721 & 731.
- The charging order protection from
a personal lawsuit.
b. The disadvantages:
- You will need a buy sell agreement. It is
critical before the business starts to plan as to how to shut
down or sell the business or sell just your interest
before you start operating. This agreement will tell you how
you may get out of this arrangement if it does not
work. This will save a lot in legal fees in the long run and
perhaps more importantly it will save friendships. Unfortunately
most people do not spend the money that they should to
have an attorney put together a buy sell agreement from
the start. Typically, this is the stage that the ideas of
becoming rich are being discussed and how great everything
will be working together. Sometimes it may appear ‘negative’
to bring up the question, "what if this doesn’t
work out?" What if one partner wants to grow
this into a $10 million company and work 70 hours per week
for 8 years, and I only want it to be a $2 million company
and only work 70 hours per week the first three years? Again,
typically this is missed, who will do what is loosely
discussed, no contracts or agreements. Then 8 months later
when there is $50,000 in the checking account many times partners
develop amnesia as to what they discussed and agreed upon eight months ago, especially as to how the money was to be
spent. One partner may want to go on a vacation or take extra
money out of the company because it is ‘doing so well’ and the other partner remembers agreeing to only taking
a minimal amount of money out the first year and absolutely
no vacation time!
The bottom line is that if you can not get
through a buy sell agreement up front and agree in writing
to who will do what, DO NOT GO INTO BUSINESS WITH EACH OTHER!
- You know you will have someone you
will have to discuss each major decision with. Even if they own
2%, they will be involved. By yourself you do not have anyone
to consult with to make these decisions, while with a partner
you do. This also brings into play your partner’s spouses
opinion and perhaps their families. Remember you went into
business with probably one spouse, not the other or their
family.
- An increase in legal liability because of
this partner. Do you know every minute of the day what you
partner is doing or just said to a customer, vendor or employee?
Do they cause you legal liability without you even know it?
- You may realize that you have been influenced
by a partner who is not as sharp as you were told in the beginning.
You may have made some very poor business decisions with
this partner that you may not have made otherwise.
In conclusion there are advantages and disadvantages
for having a partner and not having a partner. Depending on whom
you listen to you will be able to find success stories and failures
for each situation. Be sure that you consider the advantages
and disadvantages for your situation and take all the precautions
and you more than likely will avoid most of the pitfalls suffered
by many.
Below is a review of sample questions that
must be asked to determine which entity may be best for you. This
will soon be expanded to over 200 questions!
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