Entity Formation Attorneys in Louisville
When you are starting a business, there are numerous steps that must be taken before you begin operations. For example, you need to raise enough capital to rent or lease a commercial location, purchase materials and equipment, hire employees, and get you through the startup phase of the business until you reach profitability. You also need to have a solid marketing strategy in place, and a viable plan to capture and grow your market share. Another important step during the pre-launch phase is to form the right business entity.
Entity formation is a crucial step in the process of starting a business. The type of entity you choose to set up a will greatly impact many aspects of your business; including how many owners you can have, how profits and losses are shared among owners, the way you are allowed to conduct operations, your liability exposure, and business taxes. Each entity type has advantages and disadvantages, and there is no right or wrong choice that fits every situation.
The right entity for you depends entirely on your specific circumstances; e.g., the type of business you are forming, the industry you are in, the number of partners you have (if you have any), your business goals and objectives, and many others. Given the importance of forming the right entity and starting your business on the right foot, it is best to consult with an experienced entity formation attorney before making a decision of this magnitude.
Since 1999, the attorneys at John H. Ruby & Associates have helped numerous aspiring entrepreneurs with business entity formation and all other aspects of business law. We have extensive knowledge of each type of legal entity, their benefits and drawbacks, and the impact each entity type would have for a specific business. We work closely with our clients, taking the time to thoroughly understand the needs and goals of their business, and helping them choose the right business entity for their situation.
We also help clients with other legal tasks in the business formation process, such as drafting and reviewing contracts (e.g., commercial leases, vendor agreements, partnership and shareholder agreements, operating agreements, etc.), obtaining any required permits or licenses with the appropriate government entity, and many others. And once your business is off the ground, we are there to provide skilled guidance and representation for any legal issues that may arise.
Choosing the Right Business Type in Kentucky
There are five general types of business entities that are recognized by the IRS. Here are some details about each type:
A sole proprietorship is the simplest and most basic type of business entity. There is no requirement to form a separate business entity to become a sole proprietor – all you need is to obtain the required business permits and licensing (if needed) and open a business bank account, and you are ready to get started. For taxes, you file using your personal Social Security number since you do not need to obtain a Federal tax ID number for the business. A sole proprietorship is a good choice for many solo entrepreneurs who are just starting out, have a limited budget, have very few or no employees, and have limited interaction with suppliers, vendors, and subcontractors.
The major advantage with sole proprietorships is they are easy to start and simpler to operate than other business types. The downside is that a sole proprietorship business is basically an extension of your personal life. This means your profits and losses are included with your personal income tax return, and you are personally liable for any debts or lawsuits the business may be facing.
A partnership is a business that is formed with two or more individuals who have an ownership stake. Like a sole proprietorship, a general partnership can be formed without the creation of a separate legal entity, and it carries with it most of the same advantages and disadvantages of a sole proprietorship; e.g., easy to start, less formal operating procedures, simpler tax filing, but with personal exposure to debts and lawsuits. One thing to point out about partnerships is that each partner is not only exposed to liability resulting from their own negligence or recklessness, but from the actions of other partners as well. This is something to give a lot of thought to when deciding who you want to form a partnership with.
Limited Liability Companies (LLCs)
A limited liability company (LLC) is an entity that many small business owners create to limit their personal exposure to liability that may result from the business. LLCs can be set up by solo entrepreneurs, small partnerships, all the way up to large corporations. LLCs are a popular choice among small business owners because they are fairly easy to setup, and owners (referred to as “members”) enjoy a lot of flexibility with regards to operations and how they want to be taxed. LLC members can choose to be taxed as a sole proprietorship, S corporation, or C corporation.
An S corporation is an entity that has much of the formality involved with a regular C corporation, but with some important tax advantages, as well as some limitations. The main advantage with an S corporation is that business income and losses “pass through” directly to the shareholders without being taxed on the corporate level. This allows shareholders to avoid double taxation by only paying dividend taxes on the business’s net income. Some drawbacks with an S corporation include limits on the number of shareholders (100 maximum), limitations on who can be a shareholder in this type of entity, and the ability to only issue common stock.
The most complicated business entity structure is a C corporation. C corporations have the most formal operation requirements, limited liability, very few restrictions on ownership, and the ability to have an unlimited number of shareholders. With a C Corp, you can also issue several different types of stock; such as convertible, cumulative, callable, and other forms of preferred stock. This can make the company more attractive for investors if you are trying to raise capital during the startup phase or later on to expand operations. As mentioned earlier, the main disadvantage with a C corporation is that corporate profits are taxed twice; once at the corporate level and again when the remaining profits are paid to shareholders as dividends.
Contact the Experienced Business Law Attorneys at John H. Ruby and Associates
Entity formation is a major decision that requires a great deal of thought, consideration, and counsel. While it is possible to restructure your business type later on, this can be more complicated and costly depending on when you decide to do this and other circumstances. This is why it is always best to choose the right business entity from the outset.
For skilled legal guidance with business formation and all other business legal matters, call John H. Ruby & Associates today at 502-895-2626 or message us through our web contact form. You may also stop by our Louisville office at your convenience.