Copyright
© 2007 John Fraker
http://www.ainerfraker.com
One
of the most important issues facing the Owners of a new business – or the
owners of an existing sole proprietorship or partnership who desire asset protection
- is how to choose the right entity for their business.
Like
many areas of life, there is no "one-size fits all" approach that is
right for every client.
It is important that you consider
the following issues before deciding:
Number of Shareholders
or Owners
"C" corporations have no limit on the
number of shareholders they may have. "S" corporations are limited to
75 shareholders and there are certain restrictions on who (or what) may qualify
as a shareholder of an "S" corporation. While a Limited Liability Company
(LLC) has no direct limit on the number of members it has, they are clearly designed
for smaller businesses in general.
Asset Protection
Entities
such as the Corporation and Limited Liability Company (LLC) offer their shareholders
limited liability from the obligations of their business. The general rule is
that: if your Corporation or LLC is sued, you can lose your investment in the
Company, but your personal assets outside the business should be protected.
Entities
like General Partnerships do not offer limited liability for their partners. Limited
Partnerships only offer limited liability to its Limited Partners - not to General
Partners who are involved in the managing of the partnership.
Pass-through
Taxation
"C" corporations by definition have two-levels
of tax: the corporate level, and the personal level (for dividends distributed
to shareholders). Other entities, such as Partnerships, "S" Corporations,
and most Limited Liability Companies, offer pass-through taxation. In these cases,
there is no "entity-level" tax for Federal Income tax (although some
State taxes may apply to the business). Income passes directly through to the
Shareholders, and is reported on their individual tax return.
Ease
of Use
While Corporations offer many benefits to their Shareholders,
they do involve "Corporate Formalities" which must be observed in order
to preserve asset protection. Failure to "observe the corporate form"
may lead to a plaintiff or creditor piercing the corporate veil. The theory goes:
if you do not respect your corporation or LLC as an entity separate from yourself,
then neither will a court of law. If the corporate veil is pierced, then creditors
may be able to go after your personal assets to satisfy judgments against the
business.
As a general rule, Limited Liability Companies
have fewer "formalities" that must be observed. This means that it is
much harder for a creditor to "pierce the corporate veil", and thus
enhancing the creditor protection of the LLC. Their ease of use are one of the
primary benefits of an LLC.
About the Author
John Erik Fraker, attorney and founding
partner in the Law Firm of Ainer and Fraker, LLP, is committed to helping people
fulfill their estate planning goals through education, research, and implementation.
Mr. Fraker is a graduate of the University of California at Berkeley and of the
University of Southern California Gould School of Law (J.D.). For additional information,
visit http://www.ainerfraker.com
