Annapolis Business Entity Selection Attorneys
Anne Arundel County Partnerships Lawyers
At the Law Offices of Merrill, Cruttenden & Collinson, P.A., we provide business owners and entrepreneurs with experienced advice on business entity selection. Whether you are a sole proprietor looking to limit your liability or a family-owned business planning to incorporate, we can advise you on a business entity that will further your business goals.
A business should be structured with tax planning and liability in mind. The separate types of business structures to choose from are as follows:
Once the business entity selection process is complete, our firm can help you with the technical steps of business formation, including filing documents, drafting articles, bylaws, operating agreements or partnership agreements, and applications to other taxing authorities.
After your business is formed, we counsel on capital needed for startup and continuing business operations. We may have contact with you on a daily basis if that is what you need to ensure the health of your business.
Contact Merrill, Cruttenden & Collinson Today
Please contact our Maryland business law firm or call our office at 410-881-0355 to schedule a consultation with our experienced business lawyers. We offer our prospective business law clients a free one-half hour initial consultation.
Summary of Structures
A sole proprietorship is a business with one owner and is a common form of business organization because it is easy to form and operate. A sole proprietorship is not separate from its owner. It is simply the owner representing himself/herself to the public under a different name.
There are several advantages to forming a sole proprietorship, including:
- In most cases, no legal documents need to be filed and a person only needs to get a business license to begin operations.
- A sole proprietorship is known as a pass-through entity, which means that all income and expenses pass through to the owner and are filed as part of the owner's personal return, requiring no additional tax return to be filed.
- A business loss will mean a tax deduction for the owner to offset personal (paycheck) income.
The advantages of a sole proprietorship may be outweighed by its disadvantages. For instance, whoever sues the sole proprietorship actually sues the owner, and the owner’s personal exposure is unlimited. Also, if the business makes a profit, the owner is responsible for any taxes due. Furthermore, owners can lose some lucrative tax-free fringe benefits because they cannot participate in company-funded employee benefit plans like medical insurance and retirement plans. Finally, the business owner is personally liable for the debts of the company and unfortunately, personal assets can be taken to pay company obligations.
- General partnership — A general partnership is similar to a sole proprietorship but has two or more owners. Like a sole proprietorship, a general partnership is not a separate legal entity from its owners. Unlike a sole proprietorship, however, a general partnership can hold property and incur debt in its name.
While a general partnership shares the same advantages and disadvantages as a sole proprietorship, a general partnership has additional drawbacks. First, a partner can be held liable for the acts of the other partners, increasing personal liability. Second, although it is a pass-through entity and does not pay its own income tax, a general partnership does file an informational tax return with the IRS. The pro-rata share of its income and expenses are shown on each partner's personal return, and any taxes due are paid by the partners. A general partnership can elect to be taxed as a corporation.
- Limited partnership — A limited partnership is a partnership with general and limited partners. General partners are subject to unlimited liability (like a general partnership), but the limited partners are only subject to liability either up to the amount they agreed to contribute to the partnership or to the amount for which they have otherwise agreed to be liable. However, to retain this limited liability protection, the limited partners are generally prohibited from participating in the management of a limited partnership. Generally, a limited partnership is taxed the same as a general partnership and can elect to be taxed as a corporation.
- Limited liability partnership (LLP) — Partners in an LLP are not liable for any debts and obligations of the LLP merely by virtue of being a partner of the LLP. An LLP is taxed the same as a general partnership and can elect to be taxed as a corporation.
- Limited liability limited partnership (LLLP) — Limited partnerships can register as limited liability limited partnerships, in which the general partner is shielded from unlimited liability in the same manner that general partners in LLPs are shielded. An LLLP is taxed the same as a general partnership and can elect to be taxed as a corporation.
A corporation is an "artificial person" created and operated with the permission of the state where it is incorporated. It is brought to life when a person (thereafter known as the “incorporator”) files a form with a state known as the articles of incorporation. The owner or owners of a corporation are known as shareholders. A corporation is a separate legal entity capable of being sued. This allows a corporation to protect its owners (shareholders) by absorbing the liability if something goes wrong.
As a separate legal entity, a corporation actually owns and operates the business on behalf of the shareholders, under the shareholder's total control. This separation provides a legal distinction between the owner and the business and provides three important benefits:
- It allows the owners to hire themselves as employees (typically as officers — president, vice president, etc.) and then participate in company-funded employee benefit plans like medical insurance and retirement plans.
- Since owners and a corporation are separate legal entities, lawsuits can be brought against the corporation instead of the owners personally.
- When debt is incurred in a corporation’s name, as a separate legal entity, the owners are not personally liable and their personal assets cannot be taken to settle company obligations; the shareholders only exposure is the amount they have invested in the corporation.
Shareholders have the ability to freely transfer their stock subject to securities laws restrictions and any stockholder agreements.
Subchapter C Corporation
A subchapter C corporation is a corporation that pays federal income taxes on its income. It is a distinct and separate taxpaying entity that differs from Subchapter S corporations, partnerships and LLCs, which are pass-through entities. For example, the losses of a Subchapter C-corp are not passed through to its shareholders for use against their other income.
A subchapter C-corp has the advantage of being able to use different classes of stock in order to divide the economic interests and voting rights in such a corporation. A disadvantage of a C-corp is that it cannot claim a deduction for the dividends it pays its shareholders. In addition, the shareholders have to include the dividends in their gross income.
Subchapter S Corporation
A subchapter S corporation affords the legal advantages of the corporate form without some of its income tax drawbacks. It is formed as a regular corporation under state law, but it makes a specific election to be an S-corp under the IRS code. Once election is made, an S-corp needs to monitor its activities to avoid losing the S-corp status.
S-corp stock may only be owned by certain individuals, trusts and tax exempt entities. Additionally, an S-corp can only have one class of stock and debt. Despite this, the one class of stock can have different voting rights. Finally, an S-corp is limited to a certain number of shareholders.
S-corps pay no taxes. The S-corp’s income or loss passes through to its shareholders, who include their share of the income or loss on their individual income tax returns. As a result, an S-corp and its shareholders pay only one level of tax (at the shareholder level) on the S-corp’s income.
Limited Liability Company (LLC)
An LLC is a hybrid entity that has favorable aspects of both the corporation and partnership structures. An LLC may be taxed like a partnership (pass-through taxation) and has the limited liability of a corporation.
An LLC with two or more members (members are akin to partners or shareholders) can choose to be taxed as either a corporation or a partnership. An LLC with only one member can elect to be taxed as a corporation or to be disregarded as an entity separate from its owner (i.e., taxed like a sole proprietorship).
An LLC is governed by an operating agreement or by the LLC statutory provisions. Without an operating agreement, all profits, losses and voting rights of the members are based on their original capital contributions to the LLC, each member has the authority to bind the LLC in the same manner as a general partner of a partnership, and a member cannot transfer his or her ownership in the LLC to another party (to be admitted as a full member) without the approval of all other members of the LLC. Any of these statutory provisions can be varied by the operating agreement or articles of organization. A member of an LLC can participate in management of the LLC without jeopardizing its limited liability status.
Contact Merrill, Cruttenden & Collinson Today
If you need to talk to a lawyer about the selection and formation of your business, we are here for you. Please contact our Maryland business law firm or call our office at 410-881-0355 to speak with an experienced Maryland business attorney. We offer our prospective business law clients a free one-half hour initial consultation.