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Lexis Practice Advisor® Business & Commercial

Choosing a Business Entity: What’s the Right Fit for Your Client?

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WHERE DO I BEGIN WHEN CHOOSING AN ENTITY?

Three basic questions:

1. LIABILITY

2. COST

3. CONTROL

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LIABILITY

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LIABILITY

• To help you determine the best choice of entity, assess your client’s risk of liability.

• Your client’s appetite for dealing with legal paperwork and statutory formalities also factors into the liability analysis.

• Liability insurance is an option.

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COST

COST

MaintenanceEntry

Taxes Capital

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COST – 4 Factors

1. Entry Costs

•Filing Fees (State)•Filing Fees (Federal)•Licenses, Registrations and Permits•Publication Requirements

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COST

2. Maintenance Costs

•Upfront vs. Long-Term Considerations•Annual Reports /Statements of Information

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COST

3. Taxes

•Taxable Entity•Pass-through or Conduit Entity•Not-For-Profit Entity

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COST

4. Raising Capital•General Partnerships → Limited Ability •Limited Liability Companies → Limited Ability

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CONTROL

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CONTROL

• Ownership structure is key

• The number of owners drives business entity choice

• Control has both external and internal importanceo External: Third party perceptiono Internal: Flexibility and predictability

among owners

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REMINDERS…

It’s a balancing act!

Do your state homework!

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Sole Proprietorships

Step 1 – What is it?Step 2 – Liability → UnlimitedStep 3 – Cost → Minimal Entry and Tax,

High CapitalStep 4 – Control → Maximal

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Sole Proprietorships

Scorecard

Best Suited For:

• A sole proprietorship would be a good choice for someone who is looking to start a one-person business quickly and at a low entry cost. Their business should not have excessive outside investment needs and should be extremely low-risk. o Example: Assuming they could procure outside

malpractice insurance, an accountant may choose the sole proprietorship form of entity.

LIABILITY COST CONTROL- +/- +

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General Partnerships

Step 1 – What is it?Step 2 – Liability → UnlimitedStep 3 – Cost → Minimal Entry and Tax,

High CapitalStep 4 – Control → Maximal

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General Partnerships

Scorecard

Best Suited For:

• A general partnership would be a good choice for two or more individuals who are looking to start a business quickly and at a low entry cost. Their business should not have excessive outside investment needs and should be relatively low-risk. o Example: Assuming they could procure outside

malpractice insurance, an accounting firm may choose to operate as a general partnership.

LIABILITY COST CONTROL- +/- +

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Limited Partnerships

Step 1 – What is it?Step 2 – Liability → Both Limited and UnlimitedStep 3 – Cost → High Entry, Low Tax and CapitalStep 4 – Control → Maximal

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Limited Partnerships

Scorecard

Best Suited For:

• A limited partnership would be a good choice for a business in which there is a clear division between those providing labor and those providing capital. It would also be a good choice for a one-off venture or a venture that is limited in duration.o Example: Real estate ventures are often organized as

limited partnerships. Typically, an experienced property manager or developer serves as the general partner and outside investors provide financing for the project in exchange for a share of ownership as limited partners.

LIABILITY COST CONTROL+/- +/- +

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Limited Liability Partnerships

Step 1 – What is it?Step 2 – Liability → LimitedStep 3 – Cost → High Entry, Minimal Tax,

High CapitalStep 4 – Control → Maximal

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Limited Liability Partnerships

Scorecard

Best Suited For:

• A limited liability partnership would be a good choice for a professional service business that requires a state license in order to operate.o Example: Groups of attorneys, architects,

chiropractors, dentists and doctors are often organized as limited liability partnerships.

LIABILITY COST CONTROL+ - +

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Corporations

Step 1 – What is it?Step 2 – Liability → LimitedStep 3 – Cost → High Entry, High Tax,

Minimal CapitalStep 4 – Control → Mixed• Transparency in Governance (+)• Transferability of Ownership Interests (+)• Compliance (-)

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Corporations

Scorecard

Best Suited For:

• A C corporation would be a good choice for a business that requires strong liability protection and will be seeking venture capital financing in the near future. If the owners will initially be investing significant amounts of their own money and would like to write off losses (i.e. via a pass-through structure), then an S corporation may be considered.

o Example: A startup tech company that is looking to become the next social media success would likely choose the corporate form.

LIABILITY COST CONTROL+ +/- +/-

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Limited Liability Companies

Step 1 – What is it?Step 2 – Liability → LimitedStep 3 – Cost → Minimal Entry, Minimal Tax,

High Capital (but changing)Step 4 – Control → Maximal

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Limited Liability Companies

Scorecard

Best Suited For:

• A limited liability company would be a good choice for a business that (i) needs liability protection, (ii) wants to avoid dual taxation, and (iii) requires flexibility with respect to how the business is managed and allocations are made.

o Example: LLCs are ideal for real estate companies, because each separate property can be owned by its own, individual LLC, thereby shielding not only the owners, but their other properties from cross-liability.

LIABILITY COST CONTROL+ +/- +

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Top 5 Takeaways from Today’s Presentation

1. Sole Proprietorship – Should generally be avoided by entrepreneurs due to unlimited personal liability and high capital costs.

2. General and Limited Partnerships – Similar to a sole proprietorship and should generally be avoided by entrepreneurs due to unlimited personal liability and high capital costs. Limited partnerships may come into play in specific types of deals, but will generally not be used otherwise.

3. Limited Liability Partnerships – Solid choice for the professional business.

4. Corporation – A corporation should be the first choice for an entrepreneur that will be seeking venture capital financing. Trade compliance burden for liability protection.

5. LLC – Because of their flexibility, tax benefits and liability shield, LLCs are a very attractive option for many types of businesses, assuming venture capital financing is not needed.

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Q&A Session

Rob Cortes, Esq.LexisPracticeAdvisorCLEs@lexisnexis.comwww.lexisnexis.com/practice-advisor