An important business planning point is selecting the right form of business organization to best meet the business and personal needs of the owner of a closely held business.
Our position is that the traditional forms of business organization – sole proprietorship, general partnership and regular corporation – are no longer suitable for the small business owner.
No matter what your business, the usefulness of the sole proprietorship is over. The ease and informality of a proprietorship is more than offset by the unlimited liability risk of commingled ownership of your business and personal assets in individual name. The same argument holds true for a general partnership – the unlimited liability of a general partner trumps the ease of operation of a partnership. Thirdly, the traditional corporation offers few benefits and a raft of drawbacks, including the double taxation of business income and owner distributions.
More modern business structures more suitable to small business are the limited liability company (“LLC”) and the Sub S corporation. Each entity yields good liability protection for the owner’s personal wealth with pass-through income taxation to the owners and facilitates the fractional transfer of the business to the next generation.
An LLC is the best form for the typical small business. Inexpensive to form and easy to maintain, business income produced by an LLC passes through to the owner as self-employment income with only modest record-keeping responsibilities. A Sub S corporation also enjoys direct pass-through of business income and lowers the owner’s Social Security tax liability better than a LLC. On the other hand, the Sub S is more expensive to establish and maintain and is not as flexible as the LLC for estate transfer purposes.
We can help you determine the right legal structure to maximize the value of your business.
