A Client’s Guide to Selecting the Business Entity

PART II. DISTINGUISHING FACTORS AMONG BUSINESS ENTITIES

In this 6 week series we are discussing topics relating to Selecting a Business Entity. Last week we began by discussing why it is necessary to form a business entity. That blog post can be found here: Selecting a Business Entity A lot goes into choosing your business structure so today we will be discussing some of the distinguishing factors among business entities.

Each of the potential business entities can generally be distinguished by reference to the following issues and characteristics:

  1. the formalities and procedures involved in forming and organizing the entity;
  2. the manner in which the entity facilitates the fulfillment of the financing and credit requirements of the underlying business, either through the issuance of ownership interests or by credit arrangements based on the assets of the business and its owners;
  3. the rights of the principals to participate in management of the activities of the enterprise, as well as the ability of the principals to enter into contracts and other arrangements with outside parties;
  4. the allocation of profits and losses from the activities of the business among the principals;
  5. the extent to which the principals will be personally liable for the debts and obligations of the business;
  6. the ability of the owners to transfer their ownership interests in the enterprise without causing a disruption or termination of the business;
  7. the effect of the death, withdrawal or retirement of any of the owners on the continued existence of the business; and
  8. the income tax consequences associated with forming, operating, making distributions from, and terminating, the entity, as well as the income tax consequences of transferring an ownership interest in the business back to the entity or to another party.

In the coming weeks, we will be discussing Limited Liability Companies, Corporate Forms of Business Organization such as Regular Business Corporations, Tax Classification of Business Entities and then offering suggestions for determining which of these business structures would best fit specific situations.