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Forbes
06-06-2025
- Business
- Forbes
Solos, Corporations, And LLCs: What Works Best For Your Business?
Getting the choice of entity right at the start is crucial, since switching later can have tax and other consequences. When you're getting started in business, it can be tempting to rush through to get to the good stuff. After all, you have a cool idea and an even cooler sounding name. Can't you just tack 'LLC' onto the end using one of those online services? The short answer is no. Entity selection is more important than you think. Your choice of entity can affect the number and identity of shareholders and partners, equity structure, control and management, as well as the type of funding you may be eligible to receive. I know what you're thinking: why not just pick something to get started and change it if it doesn't work? Getting it right from the beginning is crucial. While it's true that you can make a switch later on, there could be tax and other consequences that may impact you in the long run. The best plan is to get it right the first time. When making a choice about an entity, there's a lot to consider, including two key things: Entity choice can get pretty complicated. There are several key factors to consider, including liability, organizational control, potential funding sources, and tax implications. What follows is a brief primer on the most common forms of entity (with a focus on taxes, of course): The sole proprietorship is the simplest form of business entity. There is no formal procedure to establish a sole proprietorship—no forms to fill out, no agreements to sign, and no documents to file with the state. With few formal accounting requirements, transferring personal and business assets in and out of the business is easy. However, the absence of formal requirements means that the owner of the sole proprietorship can be personally liable for the business's debts and obligations, including tax bills and legal awards. When creditors, including the IRS, attempt to collect, they may be able to reach personal assets, like your house, to satisfy judgments. For federal tax purposes, taxpayers do not file a separate tax return for a sole proprietorship. Income and expenses from the business are reported on an individual taxpayer's Form 1040 on Schedule C. In some cases, that produces a less favorable tax result—but on the plus side, losses from your business can be used to offset other taxable income. Establishing a partnership (or general partnership) is nearly as easy as creating a sole proprietorship—it's just an association of two or more individuals who agree to run a business for profit. As with a sole proprietorship, most states do not require formal procedures to establish a partnership—there are no forms to complete, no agreements to sign, and no documents to file, even though having these is advisable for business and legal purposes. In a general partnership, partners share liability for business obligations (typically, jointly and individually). For federal tax purposes, although a partnership is required to file a separate return (Form 1065), the income and losses associated with the partnership pass through to the individual partners. Items of income or loss retain their character and are reported to each partner in proportion to their interest, as determined by statute or the partnership agreement. Each partner is then responsible for reporting that information on their individual tax returns. A limited partnership is typically defined as a partnership formed by one or more general partners and one or more limited partners. General partners are treated much like what we think of as "typical" partners—they have joint and several liability for the partnership's debts and often exercise control over the partnership. The 'limited' in a limited partner means that those partners may enjoy limited liability protection from the partnership's liabilities (this depends on state law), but it also tends to mean that those partners have a lesser role in operations and decision making. For federal tax purposes, a limited partnership is treated as a pass-through entity, similar to a general partnership. A limited liability partnership (LLP) is similar to a general partnership, but unlike a general partnership, which can exist informally, an LLP must be registered with the state. The benefit of registration—a formal acknowledgment of the entity—is that the LLP assumes a form of limited liability similar to that of a corporation. Typically, this means that partners aren't liable for the wrongful actions of the other partners, though the level of liability can vary from state to state. Generally, there is unlimited personal liability for the partnership's contractual obligations, like promissory notes and mortgages. For federal tax purposes, an LLP is treated as a pass-through entity, similar to a general partnership. Just over half of U.S. states recognize a limited liability limited partnership (LLLP). You can think of an LLP as a general partnership with limited liability, so adding that extra 'L' typically results in an LLLP being treated as a limited partnership with that same limited liability. That means that the primary advantage of an LLLP is limited liability protection for the general partner. For federal tax purposes, an LLLP is treated as a pass-through entity, similar to a general partnership. The limited liability company (LLC) remains the most popular type of business in the U.S.—approximately four in 10 small businesses will form as an LLC. Here's what makes it so popular: it offers the liability protection of a corporation while allowing for taxation as either a partnership or a corporation. An LLC consists of members, rather than shareholders. Individual members are generally protected from liability as long as corporate formalities are maintained. LLCs must typically register with the state and are often required to comply with additional requirements, such as annual reports. Even with the extra paperwork, LLCs typically have considerably fewer corporate formalities than other corporations. For federal tax purposes, the default tax treatment of an LLC is that it operates as a pass-through entity (meaning that it will file a partnership tax return). However, an LLC can opt to be treated differently by making an election. There may be instances where corporate tax treatment is more desirable (for example, when the individual members are foreign nationals) or when it makes sense to be taxed as an S corporation (typically related to compensation). It's worth noting that states may impose additional corporate taxes on LLCs, even if they are otherwise considered partnerships, which can increase the costs associated with being an LLC. A single-member limited liability company (SMLLC) is just what it sounds like: an LLC with a single member. An SMLLC retains the advantages of an LLC for most purposes—except when it comes to tax. For federal tax purposes, an SMLLC is treated as a "disregarded entity.' This means that the owner does not file a separate tax form for the business. Instead, income and expenses are reported on an individual taxpayer's Form 1040, Schedule C, just like a sole proprietor. While all states recognize SMLLCs, the tax treatment is not the same in every state (meaning that not all states treat SMLLCs as disregarded entities). A C corporation—which gets its name from Subchapter C of the Internal Revenue Code—is what most people consider when thinking about a business. In a typical C corporation, the business is owned by individual shareholders who hold stock certificates or shares (yes, we still call them certificates even though it's rare to have an actual piece of paper in hand). Shareholders vote on policy issues, but the decisions regarding company policy are left to the Board of Directors. The catch? The Board of Directors is typically elected by the shareholders. The day-to-day operations of running the company are performed by the officers of the corporation—think chief executive officers (CEOs). The primary advantage of a C corporation is limited liability—individual shareholders are typically not responsible for the company's debts, obligations, and actions. For federal tax purposes, a C corporation is a separate taxable entity that figures income or loss each year and pays tax on taxable income. The current federal corporate income tax rate is a flat rate of 21% (before 2017, the rate was 35%). Shareholders also pay tax at their individual income tax rates for any dividends or taxable distributions paid out during the year. Since tax is already paid on the company's profits, this is where the term "double taxation" originates. A professional corporation (PC) is a type of corporation limited to specific occupations, typically service professions such as law, medicine, and architecture. A PC is generally not allowed to extend its services beyond those for which it was specifically incorporated with the state. For example, a PC for law cannot offer design services. In most states, this also means that individuals who are not licensed in the profession may not be shareholders—this rule applies not only to employees but also to potential investors and family members. For federal tax purposes, a PC may elect to be taxed as either a C or S corporation. Most PCs are considered personal service corporations (PSC) by the IRS. However, the terms don't mean the same thing—a PC is the legal entity, while a PSC is the tax classification. Currently, a PSC is taxed at a flat rate of 21%. A benefit corporation, also known as a B corporation, is a legal entity recognized in most states. It enables a corporation to consider social and environmental impacts when making management decisions as part of a broader public benefit. This differs from other for-profit corporations, which typically have a duty to shareholders to prioritize profits—it also means that some benefit corporations are less attractive to investors. Well-known benefit corporations include King Arthur Flour and Patagonia. For federal tax purposes, there is no difference between a B corporation and a C corporation—they are taxed the same. Don't confuse a benefit or B corporation with a B Corp. Although they sound the same, a B Corp is a business certified by B Lab, a third-party organization. To certify as a B Corp, a business must meet specific requirements, including achieving high social and environmental performance scores. You can certainly be a B Corp as a benefit corporation (see again King Arthur), but the terms are not interchangeable. Importantly, a B Corp doesn't confer any particular legal status. For federal tax purposes, a B Corp does not result in any tax benefit. You are taxed according to your entity status and federal tax elections. An S corporation is often misunderstood. It's not a legal entity—it's a tax election that gets its name from Subchapter S of the Internal Revenue Code. To be considered an S corporation, a business must be formed as a separate legal entity (such as a corporation or LLC) at the state level. Then, an election is made at the federal level to be taxed as an S corporation. Under federal law, an S corporation must be a domestic corporation with shareholders who are domestic individuals, trusts, or estates (no partnerships, corporations, or non-resident alien shareholders). An S corporation can have no more than 100 shareholders, and most offer only one class of stock. Additionally, certain types of businesses, such as certain financial institutions, insurance companies, and domestic or international sales corporations, aren't eligible to elect S-status. Those limitations mean that an S corporation may not be a good fit for companies expecting to grow quickly and seek outside investment. For federal tax purposes, S corporations are considered pass-through entities, though not quite like partnerships. There is a separate tax return for an S corporation (Form 1120-S) that reflects key differences in how income and losses are accounted for compared to a partnership. However, like a partnership, most items of income or loss retain their character and are reported to shareholders in proportion to their interest. A considerable appeal of S corporations is that they allow owners to take both a salary and a distribution from the business. Since distributions aren't subject to payroll taxes (Social Security and Medicare), the result can sometimes result in tax savings—it can also create an incentive to shrink wages and inflate distributions. The IRS insists that owners be paid reasonable compensation—being greedy can land you in hot water. A corporation sole can be a legitimate entity organized for religious (non-profit) purposes in some states. However, despite what scammers suggest, a taxpayer cannot use a corporation sole created simply to avoid paying tax. The IRS has issued warnings about these scams for decades, but taxpayers still bite—often in a failed bid to secure protection from creditors. For federal tax purposes, a bona fide corporation sole may be exempt from tax. However, individual taxpayers who claim tax benefits based on a corporation sole scheme will not only have to pay the tax due (plus penalties and interest) but may also face substantial civil and criminal penalties. Small businesses have lots of choices when it comes to selecting an entity and making tax elections. However, not every choice is interchangeable with another, and where you live might limit your options. Additionally, your facts and circumstances—including your plans for future investment—can mean that one choice is necessarily better than another. Consult with a professional before taking action.
Yahoo
22-05-2025
- Business
- Yahoo
Texas business law overhaul would shield Musk pay package and up Delaware stakes
Texas rewrote its business laws, hoping to capitalize on companies' growing discontentment with Delaware. A bill enacted earlier this week makes it significantly harder for shareholders to bring lawsuits like the one that challenged Elon Musk's $56 billion pay package in 2017 and caused the billionaire to move Tesla's legal home from Delaware to Texas. The new law lets companies adopt rules that would require shareholders to hold at least 3% of the stock to file a common type of lawsuit. It also would replace trial by jury — a big risk for companies, given their unpredictability — with a hearing by a judge in a special court for business disputes created last year. While Texas business law is largely untested, the slew of changes has caught the attention of top securities lawyers, some of whom expect clients will be enticed by the corporate-friendly mentality Texas is pushing. Tesla is the biggest company incorporated in Texas and moved last week to adopt that 3% litigation threshold — at current prices, a $31.5 billion bar cleared only by Musk and a handful of passive index funds that are unlikely to ever sue. As the company's board weighs a fresh pay package for the CEO, who has said he will soon refocus on Tesla, it can do so knowing it's unlikely to be sued. A separate bill under consideration could shield companies merely headquartered (rather than legally incorporated) in Texas, a much broader group that includes AT&T and ExxonMobil, from 'gadfly' shareholder proposals by requiring minimum stock holdings of at least $1 million. Exxon has faced such proposals from climate activists and fought back aggressively. And in a move sure to please both Musk and Jamie Dimon, Texas legislators are currently considering a bill that would regulate shareholder advisory firms like ISS and Glass Lewis by requiring them to only consider the financial interest of shareholders when making recommendations. Where this leaves both active and passive shareholders is a larger question. Index funds like Blackrock and Vanguard are unlikely to be particularly opposed to reincorporation out of Delaware, one leading securities lawyer told Semafor. Activist investors, on the other hand, have come to rely on a familiar set of tricks afforded by Delaware law — including books and records requests, known as Section 220 demands in Delaware — to put pressure on companies. Texas' business code allows shareholders to request that information broadly, but puts guardrails on its scope by excluding emails and text messages from being obtained (to the chagrin of journalists, too.) Mercado Libre is asking shareholders to approve a move to Texas. Meta a Texas move, The Wall Street Journal reported, but ultimately didn't put it before shareholders this year. and , both controlled companies, are seeking to move to Nevada. Southwest Airlines and a slew of energy companies are the only other big S&P 500 companies currently incorporated in the Lone Star State. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Forbes
13-05-2025
- Business
- Forbes
15 Frequently Asked Questions About Starting A Business
By Richard D. Harroch Having been a startup lawyer, entrepreneur, and venture capitalist, I have been asked many of the following questions over the years by entrepreneurs when starting a business. Sometimes there isn't an easy answer, and as lawyers often like to say, 'It depends on the circumstances.' But here are my shorthand answers to the most frequently asked questions on starting a business, which hopefully will be right 95% of the time. Start it as an S corporation or an LLC, unless you have to issue both common stock and preferred stock; in that case, start it as a C corporation. An S corporation can easily be converted later into a C corporation. Partnerships and sole proprietorships are to be avoided because of the potential personal liability to the owners of the business. The standard answer to this is Delaware because of its well-developed corporate law. However, my answer is that in most instances it should be the state where the business is located, as this will save you some fees and complexities. You can always reincorporate later in Delaware. As much as you can reasonably afford, and in an amount to at least carry you for 6-9 months with no income. What you will find is that it always takes you longer to get revenues, and that you will experience more expenses than you anticipated. Any of the following: This is difficult. First brainstorm with a bunch of different names. Then do a Google search to see what is already taken, and that will eliminate 95% of your choices. Make it easy to spell. Make it interesting. Don't pick a nonsensical name where people won't have a clue as to what you do (with all due respect to names like Google and Yahoo). Do a trademark/tradename search on the name, then make sure you can get the domain name. See What Should I Name My Startup: 13 Smart Tips. The key challenges to starting a small business are: Key mistakes made by entrepreneurs include: Ideas are a dime a dozen. It's the actual implementation of an idea that is more important. If it's truly unique, get a patent for it (see You may get some protection through copyright, trade secret programs, or NDAs, but not a lot. Every good '.com' domain name is already taken. And I usually only recommend '.com' names. Ultimately, 99% of domain names are available to be bought—you just have to be prepared to pay for the name. Do a 'WHOIS Search' at to find out the contact information for the owner of the domain name you are interested in, and offer to buy the name. Don't be naive and offer $500 for a premium domain name. You will be ignored. Be willing to pay a fair amount for a good name. Entire books are written on how to get website traffic. The key ways are as follows: Key steps to take: It's sometimes useful to come up with a business plan to think through what you want to do for the development of the product or service, marketing, financial projections, and more. Then get input from trusted business/finance advisors. But don't go overboard with a 50-page business plan. In reality, many startups have to deviate from their plan. See Don't Waste Time on a Startup Business Plan—Do These 5 Things Instead. Consider the following insurance, depending on your business: Related Articles: Copyright © by Richard D. Harroch. All Rights Reserved.
National Post
12-05-2025
- Business
- National Post
This software program offers access to thousands of simplified contract templates
This article was created by StackCommerce. Postmedia may earn an affiliate commission from purchases made through our links on this page. Article content Article content You shouldn't have to spend hundreds of dollars to write up a basic agreement, but that's often the reality for startups, freelancers and small business owners navigating legal forms. A smarter solution is gaining traction as a simplified way to still get the paperwork done right. Article content Article content DocPro is a DIY contract template program that helps you skip costly fees by taking matters into your own hands. And don't worry, that doesn't mean you'll be guessing your way through the legal system. Find investment agreements, contracts, NDAs and more, then customize them by answering a few questions. Article content DocPro gives users access to more than 2,800 lawyer-drafted document templates covering legal, business and professional needs. These include service agreements, employment contracts, board resolutions and even personal-use forms like rental agreements and school letters. Article content Each template is fully customizable through a guided, step-by-step document builder. Instead of figuring out which clauses to include or worrying about structure, you simply answer a few questions and DocPro fills in the rest for you. From there, you can download and edit your file in Microsoft Word, making it easy to adjust details as needed. Article content For business owners operating in common-law jurisdictions, DocPro's jurisdiction selection engine ensures each document is legally aligned. That means whether your work stays in Canada or stretches to the U.K. or Australia, you'll find documentation that suits your legal environment. Article content Article content Pay once, use as much as you need during the year Article content Article content Unlike traditional legal platforms or SaaS-style contract tools, DocPro doesn't limit you to a few downloads per month. With this one-year license, users can generate and download as many documents as they need, making it a good fit for anyone with a temporary project, seasonal business or startup in its early growth stage. Article content
