Choosing a Business Entity – Which One is Right for Your Business?
Now that you have decided to launch a business, you need to decide which business entity is right for you. I’ll explain the differences between sole proprietorship, partnerships, corporations and limited partnerships. I cannot stress enough the importance of having a discussion with your CPA or tax adviser as to how each entity may affect you and taking that into consideration when making a decision, especially now with the prospect of new tax code legislation.
The simplest entity in New York is that of the sole proprietor – all you have to do is open one up in your own name, no paperwork required. Should you want to open in a trade name, such as “Gidget’s Gadgets,” you will need to file paperwork with the county where the business is located, usually at the county clerk’s office. The largest downside to a sole proprietorship is that of total personal liability, and when you pass away, the business dies with you.
Partnerships are another simple way to set up a business. They have the advantage of not having the expense of a corporation, but the disadvantage of personal liability for the partners and ending when a partner passes away or goes bankrupt.
Corporations cost money to create and have very specific requirements even after filing. Getting the so called “corporate book” is not the end of the care and feeding of a corporation. By-laws need to be drafted, and there should be an annual shareholder meeting in order to truly be able to take advantage of the protections a corporation offers. One of the biggest advantages of incorporating is the lack of personal liability. Another is that the entity does not die with you and can be sold or taken over and kept going.
Most corporations are taxed at the corporate level, and then the shareholders get taxed again. Should your business meet the requirements, it may be able to elect “Sub-chapter S” status with the IRS. The advantage to this is that the corporation only gets taxed once as a schedule on your personal tax return. A CPA will be able to advise as to to whether this makes sense for you. Professionals such as doctors, lawyers and accountants have the ability to form a “professional corporation” designated by the letters P.C.
Limited partnerships are similar to partnerships except that some of the partners are able to limit their liability, much like in a corporation.
Speaking to both a CPA as well as an attorney knowledgeable about your type of business and business law will be helpful in making a decision.
Deborah E. Kaminetzky, Esq.
Kaminetzky Law & Mediation, P.C.
132 Spruce Street
Cedarhurst, New York 11516