Disclaimer: This is not legal advice. Please consult your attorney regarding taxes, business entities, and any legal matters.
There are a variety of business entities that can be set up for the benefit of the entrepreneur: sole proprietorships, corporations, partnerships, limited partnerships, limited liability partnerships, limited liability companies (LLCs), and series limited liability companies (series LLCs). What best suits your needs depends on what you are wanting. In the 1700’s, those wanting liability protection of a corporation literally had to get an act of parliament for their corporate charter. New Jersey later pioneered the way of streamlining corporate formations. Many businesses rushed to New Jersey to get their charters; however, Woodrow Wilson became governor of New Jersey and made corporate formation more difficult. Thanks to Governor Wilson, Delaware took on the job of encouraging corporate formation, and did a good job of it.
Corporations protected investors from being personally liable for debts and lawsuits. But they had one major flaw that they still have to this day: Corporations are taxed twice. First the income is taxed, then the distributions are taxed a second time. Not the economic situation owners want, especially small, family corporations. A new form of business entity was created called a limited liability company. This is quickly becoming one of the fastest growing types of business entities for three simple reasons: (1) unlike a corporation, you can design the company’s oversight to your desires; (2) unlike corporations, it’s only taxed once; (3) like corporations, you get limited liability. LLCs are relatively cheap to set up, with lawyer fees likely being the most expensive part if you choose to employ a lawyer (which I would suggest). In Texas, the fee is $300.00.
Generally, LLCs are better than corporations because there is less bureaucracy, reducing overhead costs. LLCs does have some statutory requirements, but not to the extent of corporations. You can set up restrictions on the transfer of ownership, allowing the company to stay in the hands of close family members and friends. However, this can be burdensome if more capital is needed to be raised. However, large companies can still be LLCs. Chrysler is one such example.
Now, there is a very recent entity called series LLCs, which is so new, not many states have them. I touched on series LLCs in a previous post. Texas does allow these types of LLCs. There is one LLC; however, there are a series of cells, like subsidiaries of a corporation, which operate as independent organizations. Each cell can sue and be sued and receive their own EIN for federal taxes. They are recognized as a single LLC, even though for practical purposes the cells are independent of each other.. Each cell or series has limited liability, separate from the liabilities of the other series. This has been a tool for real estate investors, who keep each piece of property in a separate series. This could also be utilized for a diverse company. For example, if an investment company had multiple businesses and investments, it could create different series for each one. Depending on state and federal laws, one could have a series for equities, another for commodities, another for a farm and ranch, another for real property investments, another for a retail store, and so on. The limitation is practically one’s imagination, but you should treat each series as if it was a separate business.
A major draw back is that series LLCs are not recognized in many states, so your business may be geographically restricted. In addition, with a new form of entity, especially one as complicated as series LLCs, setting up a business in this form may be risky, as the courts have not decided many of the questions surrounding this type of business entity. In fact, your lawyer may not have ever looked into it, only heard in passing at a continuing education seminar.
If you want protection from debts and lawsuits, while avoiding a double tax of a corporation, an LLC or series LLC may be worth it. Speak with your attorney to see what type of entity is right for you.
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