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Partnership, S-Corp, or LLC? How to Choose a Business Entity

I periodically give a SCORE workshop called Legal Issues for Startups, where I get lots and lots of questions about what sort of business entity to form — Should I be incorporated?  If so, where — Nevada or California or both?  Should I be an LLC or an S-Corp?  And what is an S-Corp anyway?  How about just being in a partnership?  Anything wrong with that?*

The answers to these questions boil down to two basic issues:  liability and taxes.  As a lawyer, I regularly advise my clients about the liability issues, but always recommend they check with a qualified accountant to get specific tax advice before making a final decision.**

Here’s how the liability issues work:  A corporation (or LLC)  is a separate legal entity that exists independently of its owners (who may buy and sell shares or otherwise change over time).  The debts of the corporation belong to the corporation and, provided the owners are careful about maintaining corporate formalities, their personal assets are protected and cannot be used to satisfy corporate debts.  In a sole proprietorship or partnership, on the other hand, the business debts are also personal debts, and there is no protection of personal assets when the business can’t pay.

Now, in practical terms, this may not matter too much if you are the sole owner of  a small business where you have signed personal guarantees for credit and where there isn’t much risk of being sued (e.g., certain types of consulting services).  In those situations, it may not be worth the cost and hassle of forming a corporation or LLC.  I generally recommend those clients get good insurance instead — including professional liability insurance if possible.

But if you own your business with a partner — be careful!!!  Read more

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