Choosing the Business Entity that Best Fits Your Business
- posted: Jan. 29, 2020
Stockwell Sievert Law Firm
One of the first (and most important) decisions a start-up business owner must make is deciding the type of business entity that best fits his or her business. This article provides a brief summary describing the most prevalent forms of business entities in Louisiana, as well as their advantages and disadvantages.
Sole Proprietorships and Partnerships
Sole proprietorships and partnerships are the default forms of business entities. A sole proprietorship is a business owned and run by an individual. Sole proprietorships are easy and inexpensive to form, as the owner does not have to file any formation or organizational documents with any government entities. Another advantage is the business and the owner do not pay income taxes separately; indeed, all income taxes are handled on the owner’s personal tax returns. The biggest disadvantage with a sole proprietorship is that the owner will be held personally liable for all of the business’s activities, including its debts and liabilities.
A partnership is a business entity, distinct from its partners, that can be created by written or oral agreement between two or more persons to conduct a business as co-owners. Because the partnership agreement may be oral or inadvertent, there is no filing requirement. Indeed, a partnership may be inferred even if the parties did not consciously consider or intend the business to be a partnership.
The major disadvantage of the partnership form is that partners must share the risk as well as the profits. While partners are individually liable for partnership debts, the partnership itself remains primarily liable for its debts. This means that, when a partner is sued individually for a partnership debt, the partner can require the creditor to seize specifically identified partnership assets to satisfy the debt before seizing the partner’s personal assets. However, a partner who is sued in his or her capacity as a partner is generally not entitled to any indemnification or reimbursement of litigation expenses, whether successful in the defenses of the claim or not.
Another disadvantage of the partnership form is that, unless otherwise agreed by the partners, unanimity is required to admit new partners or to terminate the partnership. Unless otherwise agreed, decisions affecting the management of a partnership require a majority vote.
Limited Liability Entities
The most well known advantage of incorporation is that, generally, shareholders are only liable for the debts of the corporation up to the limit of their investment. In other words, unlike an owner of a sole proprietorship or partners in a partnership, shareholders’ are not personally liable for the corporation’s debts. The major disadvantage of the corporate form is double taxation. That is, shareholders are individually taxed on disbursements received from the corporation, and the corporation is also taxed at the corporate entity level.
Another disadvantage of the corporate form is that corporations are subject to strict filing requirements and operational formalities. To incorporate in Louisiana, an incorporator must file Articles of Incorporation, along with an initial report, with the Secretary of State. A corporation is also required to file an annual report every year with the Secretary of State on or before the anniversary date of incorporation. Additionally, corporations are required to hold annual regular shareholders’ meetings wherein directors are elected and other business conducted (although no meeting is required to be held if no directors are up for election).
Limited Liability Companies (LLC’s)
The Limited Liability Company (more commonly referred to as “LLC”) is a relatively new type of business entity. A 1992 statute created the LLC as a new type of business form combining attributes of both corporations and partnerships. The LLC has two primary attributes. By law neither its owners (called “members”) nor its managers are liable for any of its debts – the major advantage of the corporate form. Additionally, its income will not be subject to federal or Louisiana income tax at the entity level – the major advantage of the partnership form.
Two other types of business entities combine these two attributes as well, but are subject to additional limitations. Subchapter S corporations protect shareholders from liability for corporate debts while also providing tax benefits, but there are limits on what corporations can qualify for S tax status. Commendam (or limited) partnerships also combine these two attributes, but in a commendam partnership the general partner is still liable for the entity’s debts and there are limitations on the authority of the commendam (limited) partners to be involved in management of the business.
Generally an LLC looks like a partnership with some corporate and commendam partnership concepts added. Like a corporation, an LLC is a legal “entity,” capable of suing and being sued, as well as owning property. Unlike a corporation, there are virtually no operational “formalities” required – e.g., no member meeting requirements. However, an LLC, like a corporation, is subject to mandatory filing requirements. Louisiana law requires the LLC to file its Articles of Organization, the analogue to corporate Articles of Incorporation, with the Secretary of State. An Initial Report must also be filed with the Secretary of State.
We advise you to speak to an attorney to ensure your business is formed in accordance with Louisiana law. Click here to learn more about attorneys practicing business law within the Stockwell Sievert law firm who can assist you in taking the next steps in forming your business.
By Ross M. Raley
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