When you are setting up a company it is important to create the best corporate structure to protect your assets. While there are hundreds of variations, the following is a list of the five basic types of companies you can create:1. Sole Proprietorship 2. General Partnership 3. Limited Partnership 4. Corporations 5. Limited Liability Company
Sole Proprietors
When you start a company if you fail to create a corporate structure you automatically default into a sole proprietorship. This is one of the most horrible corporate structures you can have. This type of corporate entity provides you with no asset protection. Not only is your business responsible for any debt or liability, you are personally responsible for the debt of the business. That means a creditor can come after you and force you to sell your home, vehicles or other assets to repay debt.
General Partnership
A general partnership is the worst corporate structure, because like a sole proprietorship you become 100% liable for the debts of the business. Most people assume that if they have a business partner the debt is evenly divided, that is not the case. That means you can be held personally responsible for the actions of your partners. Additionally, you must be weary of the accidental general partnership where you inadvertently create this business entity. Never set up your company with a general partnership.
Limited Partnership
Limited partnerships were one of the first corporate structures created by the government to limit the liability problems that arose from the sole proprietor and general partnership arrangements. While these were once an effective entity creation, they have become disfavored by the states and no longer are the preferred entity formation structure.
Corporation
While a corporation will provide you with asset protection for your personal assets, it requires a lot of additional work, which makes it the most complicated corporate structure. When setting up a corporation you not only have to set up the company you must also decide if your company will issue stock, etc. You also must adhere strictly to the corporate structure or you loose the protection it was intended to provide. The creation of a corporation should be limited to businesses that require this type of set up. You may have heard people talking about different types of corporations for example a C-corporation or an S-corporation. These are taxing distinctions rather than types of corporations and should be discussed with your tax advisor.
Limited Liability Company
This is the preferred entity formation. This structure can protect you from personal liability for your company and is the easiest to maintain. This structure is simpler than a corporation and affords a small business with more options than any other entity type. This company is preferred over corporations for many reasons including ease of creation, tax advantages, etc. (For more information please see our article LLC v. Corporation). These are just a few reasons why limited liability companies are the best entity type for small businesses.There are many factors that should be considered when evaluating which corporate structure is right for you and your business. You should always consult an attorney before forming a company not only to discuss corporate structures, but also to discuss licensing and other legal issues to make your corporation compliant with local rules. Additionally, you have to maintain the business entity or you lose the benefits for which you created the company.
If you have any questions regarding this article or would like to discuss which type of company works best for you with one of our attorneys, please call us at (702)448-4962 to set up a free consultation.
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