The Importance of Business Entities
Anytime a business opportunity presents itself the first question that should be asked is “How will this business/investment operate?”
This is not only important for a business that will be offering products or services to the public, but also for investments in real estate or any other existing businesses. Will you be handling day-to-day operational control, or are you just a passive investor? These key questions will determine what type of entity is best for achieving the goals of the business, while at the same time managing exposure to risk and losses. Determining a type of business entity is an important part of conducting business, not only are there tax benefits and effects to each type of entity but the officers and owners enjoy certain levels of protection against personal attacks on their assets, as long as the corporate formalities and rules are followed. There are a number of different types of entities with many pros and cons, but here are a few of the most common types used today.
Limited Liability Companies, also known as LLCs, are owned by individuals or members. A member does not have to be an individual residing in the United States but can also be a corporation, other LLC, or foreign individuals as well. As the name implies, LLC members face limited liability over the company’s actions. Likewise, they cannot be held personally responsible for the company’s actions. However, even an LLC’s protection can be broken if the members of the LLC fail to comply with the formalities required. There are fewer formalities with operating an LLC than a corporation, however, co-mingling personal and entity assets is one of the biggest issues looked at by attorneys seeking to pierce the corporate veil and attach personal liability to the owners and managers of the LLC.
Similar to LLCs, Corporations, typically designated Inc or Corp, protect from personal liability for business obligations. Corporations have stricter reporting and recordkeeping requirements than LLCs. Additionally, Corporations are made up of shareholders whose ownership is decided by the number of shares they own.
There are other forms of partnerships that could fall into the LLC or corporation category, such as a joint venture. A joint venture involves two or more individuals pooling their resources and expertise to achieve a particular goal. The risks and rewards of the enterprise are also shared equally. The typical reasons for forming a joint venture include business expansion, development of new products, or moving into new markets, particularly overseas.
If your involvement is more of a passive nature, and you will be treating it more as an investment without any operational control, then there are other ways that you can operate. General partnerships can expose individuals to personal attacks depending on how they are structured, while limited partnerships are better if structured appropriately. However, partnership documents are normally internal documents that are not public records, which will help keep your personal affairs private.
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