A Guide for Entrepreneurs: Choosing the Right Legal Entity for Your Business.
As an entrepreneur, you’ve embarked on the exhilarating journey of turning your business dreams into a reality. There are several initial steps involved in launching your business idea. You’ve got your business plan in place, secured the necessary financing, conducted thorough market research, and begun to develop your product or service. Amidst these exciting challenges, there’s a crucial decision to make: selecting the right legal entity for your new enterprise. One of the practical decisions you will have to make is to select what type of legal entity you want to create as a vehicle for your new enterprise. While this may seem like a difficult and intimidating choice. this article aims to help demystify the differences between the types of business entities available, equipping you with the knowledge needed to make an informed decision that will shape the structure of your business.
Corporation or LLC?
Selecting the right type of business entity to serve your needs can protect you from personal financial liability and help maximize your profitability. The most common form of business entity for small business owners is the Limited Liability Company (LLC). While a solo entrepreneur may elect to run their business as a sole proprietorship to avoid the business startup costs and fees for state filings, the majority of small (1-100 member) companies choose the LLC because of the financial liability protection of the personal assets of members, and the ease of governance compared to choosing to incorporate.
To form an LLC, you will file Articles of Organization with the Secretary of State who will issue a Business Identification Number (BIN). You will then use that BIN and the Social Security Number (SSN) to file for a federal Employer Identification Number (EIN). LLCs are pass-through entities, meaning that the LLC does not pay taxes at the company level. The members of the LLC pay taxes on their share of the LLC’s profits. An LLC with not more than 100 members may also elect S-Corp taxation by filing IRS form 2553, which may help reduce a company’s tax burden, since the recipient of wages does not pay self-employment tax on their salary.
Some entrepreneurs may want to form a corporation. Corporations are slightly more complex to organize and manage but may be desirable to companies who plan to take on significant outside investment, or that plan to grow quickly. Corporations are subject to double taxation; the business pays corporate taxes, and then the individual shareholders pay income taxes on their salary and capital gains on their dividends from business profits when those gains are realized. Larger corporations can benefit from C-Corp taxation due to lower corporate tax rates. A corporation must appoint certain officers such as a President and Secretary, and a board of directors. The corporate model provides flexibility to create multiple classes of stock and set the rights and responsibilities of different classes of shareholders, within certain statutory limitations.
Depending on the size and purpose of your business, you may want to elect to form a limited partnership (LP). This allows for one member of the partnership (the general partner) to be personally liable for the business, and the limited partner is relieved of liability. Normally the general partner will have decision making power and control over the business while the limited partner will have neither liability nor control but will benefit financially from their contribution and percent interest in the partnership.
Regardless of the type of business entity you choose, establishing strong partnership agreements (for a general or limited partnership), an operating agreement (for an LLC), or bylaws and a shareholder agreement (for a corporation) are key steps to ensuring that your business is set up for success.
Here are a few logistical points to consider for each type of business entity discussed:
- Corporations: In Oregon, creating a corporation requires filing Articles of Incorporation with Oregon’s Secretary of State. You must identify an incorporator and designate registered agent for service of process with a physical address in Oregon and a principal address. Though not a required state filing, you should also prepare corporate bylaws to establish your operating rules. You must also file Form 2553 with the IRS if you’re incorporating as an S Corp. The name of your corporation must include the term “incorporated”, or “Inc.”
- LLCs: Limited liability Companies, commonly called LLCs, must file Articles of Organization with the Oregon Secretary of State. As with a corporation, you will also need to appoint a registered agent and should prepare an operating agreement to establish your rules. The name of your Limited Liability Company must include the term “LLC.”
- Partnerships: Unless establishing a limited liability partnership (LLP), there is no legal filing requirement with the state. If creating an LLP, however, you must file an Application for Registration with the Secretary of State’s office.
- Sole proprietorship: Sole proprietorships do not require any legal filings with the state.
You can expect to pay $100.00 each year to file an annual report with the Secretary of State to renew your corporation, LLC, or Limited Liability Partnership. The fees for amending business filings such as making changes to the articles of organization or incorporation are $100.00 per amendment. You can make changes to the registered agent or business address at any time on the Oregon Secretary of State website without a fee.
Whether you choose to incorporate, form an LLC, or register a partnership, you may want to consider consulting an experienced business attorney to ensure compliance with your business filings and to safeguard protect your interests as an entrepreneur.
We can help.
At Chenoweth Law Group, we’re here to help you in making informed decisions and navigating the legal aspects of your business. From deciding on the right business structure to drafting and reviewing contracts, lease agreements, partnership agreements and employment law issues, we can help. Your success is our priority. Contact us at 503-446-6261 or contact us online, anytime!