Starting a new business venture presents you with three unique options: do you create a partnership, a limited liability company or a corporation? Here are some factors to consider.
- What is the intended lifespan of the company?
- How many investors are involved?
- What is the extent of the investors’ ownership and liability?
- How much time and money are you willing to spend setting up a business entity?
- What are the tax implications?
- How will you handle transfer of ownership and management?
Limited Liability Companies
Limited Liability Companies are owned by one or more persons or entities, and are formed by filing an article of organization with the state. In an LLC, members are not personally responsible for the debts of the company unless specified in the articles of incorporation.
Members may elect to treat the LLC like a corporation or partnership for tax purposes without having the liability issues of a partnership or restrictions of an “S” corporation. The LLC also must adopt an operation agreement how the company will be managed, how ownership is transferred, obligations of members and circumstances under which the LLC may be terminated.
The LLC will dissolve upon withdrawal, bankruptcy or death of a member unless otherwise specified. Like a partnership, financial interest in the LLC is freely transferable but management interest is not.
Partnerships are organizations of two or more entities joining to form a for-profit business. Business partners divide up both the ownership interest and management interest of the partnership.
Partners may assign their ownership interest (profits) to another partner without consent of the other partners, but consent is needed in order to transfer management interest (control) to another partner. Partnerships aren’t permanent and will dissolve in the event of bankruptcy, withdrawal or death of any partner.
When a partnership agreement is made, it will define the responsibilities of each partner as well as how profits and losses are allocated. The agreement will also set guidelines for ownership transfer and dissolution of the business.
It’s important to remember that in a partnership your liability is unlimited and personal assets are at risk, but partnership income isn’t subject to taxation. Usually each partner is taxed individually, but forms can be filed to have a partnership taxed like a corporation if tax savings can be made.
Corporations are owned by one or more people or business entities and the owners are issued shares of ownership. Directors, elected by the shareholders, set corporate policy and and assign officers responsible for business operations.
Corporations can own property, enter into contracts and litigation, pay taxes and conduct business through its officers and directors. Shareholders hold only limited liability and their risk is mostly limited to the value of their stock in the corporation.
Corporations are formed by filing a certificate of incorporation which establishes its name and purpose. They are, unlike partnerships, separate legal entities from their shareholders, meaning they exist perpetually and shares can be transferred without consent from other shareholders.
Corporate income is taxed twice – the corporation is taxed on its income and the shareholders are taxed on the income they receive. But shareholders who work for the corporation are eligible to receive tax-free benefits like life and health insurance. An “S” corporation is an entity that is taxed like a partnership but has the limited liability and other perks of incorporation.
If you have any questions about forming an LLC, partnership, or corporation in Kansas, contact us at 1-800-894-5931 or fill out our contact form to schedule a consultation at our offices in Hutchinson.
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