The law provides several options for people planning to start a business or restructure an existing business. Before making a decision as to whether a corporation or a partnership is best for your business it is important to consider your long term and short term business goals and to consult with an attorney specializing in corporate and business law to discuss the potential benefits and drawbacks that accompany each method of business incorporation.
Corporations and partnerships each have particular advantages and disadvantages. Most notably the formation of a corporation can shield the shareholders and owners from personal liability over corporate debts whereas with a sole proprietorship or partnership the owners are personally liable and responsible for business debts. If the assets of the sole proprietorship or partnership cannot satisfy the business debt creditors can go after each owner’s personal assets, including personal bank accounts and real property, to satisfy the debt. If a corporation runs out of funds its owners are not personally liable unless creditors can prove fraud, co-mingling of business and personal assets, or tax evasion.
Corporations also offer unique tax advantages. Earnings from a sole proprietorship are subject to a federal self-employment tax, which is currently a 13.3% tax on all profits. Corporations on the other hand are only responsible for taxes on salaries and not on profits. Corporations are given a very favorable and unique place in the law as entities that have a continuous life, meaning that a corporation and the benefits conferred upon it under the law do not expire upon the death of its shareholders, directors, or officers. Corporations also have more options to raise revenue such as issuing stocks and corporations allow for much easier transfer of ownership interests. There are cases where partnerships are preferable. Partnerships cost less to establish, have minimal formalities, and do not require the filings of documents with the Department of State. A partnership can open and operate immediately and without any filing requirements, documentation of existence, or even an operating agreement.
Working with an attorney specializing in business and corporate law is your first step towards laying a successful foundation for your business to ensure its future success. Your attorney will be able assist you in determining which legal mechanism best suits your business’s needs and properly guide you through the legal requirements that your business must follow in order to utilize the protections that are afforded under the law.