Software Club 210: Light Red/Club_Software_210_Light_Red_Micro_Star_1997.iso/sba/f117.sbe

Text File | 1997-01-19 | 17KB | 380 lines

@212 CHAP 2

        ┌────────────────────────────────────────────────┐
        │SELECTION OF LEGAL ENTITY -- OVERVIEW OF CHOICES│
        └────────────────────────────────────────────────┘

@IF901xx]Your business has not yet started up.  Thus you still have an
@IF901xx]opportunity to select the most favorable type of legal entity
@IF901xx]for @NAME when it comes into being.
@IF901xx]
@IF901xx]The following outline and summary will give you a fairly
@IF901xx]detailed overview of which type of entity is likely to be
@IF901xx]best for your particular business, which you have indicated
@IF901xx]is in the field of @BUSTYPE.
@IF901xx]
@IF900xx]Your firm, @NAME, has already selected
@IF900xx]a form of doing business, which is a @ENTITY.
@IF900xx]
@IF900xx]However, it is possible that your choice of legal entity is
@IF900xx]not the optimum alternative for your particular business and
@IF900xx]personal needs.  The following outline and summary will give
@IF900xx]you some basic guidance as to whether you should explore the
@IF900xx]possibility of switching to some other legal form of business
@IF900xx]organization at this point in the game.
@IF900xx]
Choosing the "best" legal form or entity for your business
is rarely an easy decision to make.  Each form of business,
sole proprietorship, partnership, and corporation, has its
own benefits and shortcomings, which vary in degree depending
on the kind and size of your business, your tax situation,
profitability, personal predilections, and numerous other
factors, some of which may seem important to you, others of
which may not.  Thus there is often no "right" answer as to
which legal entity you should select for operating your
business.

The following is a thumbnail sketch or overview of some of the
major advantages and disadvantages of sole proprietorships,
partnerships, limited liability companies and corporations.
Where there are differences between a general partnership
and a limited partnership, or between a regular ("C")
corporation and an S corporation, separate comments are
shown for each.  Otherwise, the comments below regarding
partnerships apply to both general and limited partnerships,
and the comments regarding corporations relate to both
regular and S corporations.

Because every state has by now adopted legislation permitting
the creation of a new kind of legal entity, called a "limited
liability company" (LLC), which is much like a partnership,
but with limited liability for all its owners, the following
discussion also includes consideration of such "LLCs" in
@STATE.

@CODE: CA
However, note that any business required to obtain a license
from the state, such as physicians, dentists, beauty shop
operators, or auto mechanics, is prohibited from forming an
LLC under California's LLC law.

@CODE:OF
As a general rule, it seems that some types of businesses
are much more likely than others to benefit from adopting a
certain legal form, as in the case of the following (press
<Enter> key for details on highlighted words):

      .ΣProfessional service firmsΦ(law, accounting, etc.);            \113

      .ΣCapital-intensive firmsΦneeding to accumulate capital;         \114

      .ΣReal estate rentalΦbusinesses, in general; and                 \115

      .ΣAuthors, inventorsΦand software developers receiving           \116
        royalty income for licensing intellectual property.



                  SIMPLICITY IN OPERATION AND FORMATION:

    .ΣProprietorshipΦ      Simplest to establish and operate.          \110

    .ΣGeneral PartnershipΦ Relatively simple, informal, but            \111
                           is usually desirable to have formal
                           written agreement between the
                           partners.

    .ΣLimited PartnershipΦ More complex and expensive than             \112
                           other unincorporated forms of
                           business to establish.  Requires
                           written agreement, filing of
                           limited partnership certificate.
                           Managed by general partners only.

    .ΣLim. Liability Co.Φ  A new type of entity, which your            \406
                           lawyer may not yet be very familiar
                           with.  Requires written articles of
                           organization, roughly comparable to
                           corporation or limited partnership
                           in terms of complexity in formation.
                           Can be formed under the state laws
                           of @STATE.

    .ΣRegular CorporationΦ Requires the most formality in              \135\231
                           establishment and operation,
                           generally.

    .ΣS CorporationΦ       Same as regular corporation, but            \234
                           requires close oversight by a
                           tax advisor, an additional cost.

                  LIABILITY FOR DEBTS, TAXES & OTHER CLAIMS:

    . Proprietorship       Owner has unlimited personal
                           liability.

    . General Partnership  Partners all have unlimited
                           personal liability.

    . Limited Partnership  General partners are personally
                           liable; limited partners are
                           liable only to the extent of their
                           investment, generally.

    . Lim. Liability Co.   "Members" (owners) not generally
                           liable for company's debts, under
                           the state laws of @STATE.
                           But may have to guarantee loans,
                           as a practical matter, if company
                           is to be able to borrow money.
                           Also, corporate officers may be
                           liable for failure to withhold
                           and pay over to IRS, withholding
                           taxes on employees' wages.

    . Corporation          Stockholders not generally
                           liable for corporate debts, but
                           often have to guarantee loans,
                           as a practical matter, if the
                           corporation is to borrow money.
                           Also, corporate officers may be
                           liable for failure to withhold
                           and pay over to IRS, withholding
                           taxes on employees' wages.

                  FEDERAL INCOME TAXATION OF
                  BUSINESS PROFITS:

    . Proprietorship       Taxed to owner at individual
                           tax rates of up to 39.6%.

    . Partnership          Taxed to partners at their
                           individual tax rates.

    . Lim. Liability Co.   Taxed to owners at their individual
                           tax rates, if organized so as to
                           be taxed as a partnership for
                           federal income tax purposes.
@CODE: AK FL PA
                           (Note, however, that for @STATE
                           state income tax purposes, an LLC
                           is taxed as a corporation.)
@CODE:OF

    . Regular Corporation  Taxed to corporation at rates
                           up to 34%, generally (marginal
                           rate is 39% at income levels of
                           between $100,000 and $335,000;
                           rate rises to 35% above $10
                           million of taxable income).

    . S Corporation        Taxed to individual owners at
                           their individual rates (but
                           certain gains are taxable to
                           the corporation as well).

                  DOUBLE TAXATION IF PROFITS ARE WITHDRAWN
                  FROM THE BUSINESS:

    . Proprietorship       No.