This short expose briefly focuses on different types of business entities and gives some insight as to which one might be better suited to general goals and situations. You should always consult with a business lawyer who can than better fashion the entity that is right for your particular business.
Professional Corporation Professional corporations, known as PCs, are available options to those in certain occupations. This structure is available to accountants, lawyers, medical professionals, architects, and engineers. Although PCs don’t offer the level of personal liability protection of S corps or LLCs, this structure does protect owners from malpractice claims filed against other associates. PCs must usually be approved by the state agency that licenses the professionals. Remember, PCs will not protect you against malpractice suits, but will eliminate your liability for claims directed at your associates. S Corporation An S Corp is much like an LLC. Net profits in an S corporation are “distributed” to stockholders, who then add these profits to their personal income for tax reporting purposes. S corps are similar to all other corporations, except for this tax issue. Other corporate requirements–holding regular management meetings, for instance–are identical to all other corporations, be they a single stockholder company or Microsoft. You create your corporation in the usual manner, as specified by your state regulations, and subsequently “elect” to be taxed as an individual, thereby creating an S Corp for IRS purposes. Limited Liability Company An LLC functions like a standard corporation in many ways, including personal asset protection, but is much less complex to organize, file, document, and manage. LLCs combine the best features of partnerships and corporations, offering limited liability to owners, while dividing up profits among the partners. Similar to S corporations, you enjoy protection for your personal assets regardless of financial or operating problems that may befall the LLC. In most cases, company creditors cannot seize the assets of the owner/members. Like a classic partnership, LLCs must file an IRS form 1065, which displays the ownership percentages of the members, for taxable income distribution. Liability Protection Warning There are some situations that may jeopardize your personal asset protection offered by corporations or LLCs. Small businesses often endure this problem because the owner(s) are frequently asked to give “personal guarantees” for loans, leases, and other obligations. When you agree to provide a personal guarantee of corporate debt, your assets–homes, autos, bank/investment accounts–are legally at risk. Other actions, such as performing illegal activities or injuring someone else, can also allow a court to remove the personal asset protection offered by corporations and LLCs. The Best Option Professionals can choose to use an S Corp or an LLC, in addition to forming a PC. The malpractice protection offered by a PC is often the most important consideration, particularly for accounting and medical professionals. If you are not a “professional,” and if your company is a one-person entity or a partnership, the LLC is often the best choice to receive the personal asset protection you want without complex corporate necessities. Should you want to attract more stockholders however, but yet plan to keep your company private (no public stock offerings)–an S Corp is often the best choice.
*Please be advised that this communication is for general public informational use only and does not establish an attorney-client relationship. For more information, please contact WFB Legal Consulting, Inc.—A BEST ASSET PROTECTION Services Group at (949) 413-6535.