My partner and I are opening up a limo company and we are not sure which type of business entity is most suitable for us. Through research I have narrowed it down to LLC or S corporation but unfortunately I am still unsure. Limited liability is a must as well as the pass through taxation and I am leaning towards an S corporation. However I am not sure about what to write in for President/Treasurer/Sec./Directors
We are investing 50/50 all the way,, might recieve funding from friends and family down the line and we will be working in the company as well. Any help would be appreciated. Thank you.
The question of which type of legal entity should be used is complex. There are tax and non-tax considerations. This decision must be made in consultation with your CPA and a business lawyer. The details are crucial to this determination because both LLCs and S Corporations have pros and cons. Please contact me if you would like to discuss this further.
There are pros and cons, so you have to weigh them yourself.
You definitely do NOT want to form a s a partnership or an LLP, the risks related to driving around a limo and the potential for collisions opens up everyone to personal liability.
If you go with the S corp, you will be limited in your pass through status if you end up growing too large. That may not be a concern for several years, but its something to think about. If you do end up having to switch to a C corp, you lose pass-through, and will be double taxed, but you get some pretty cool government benefits for employees (including yourselves if you are employees), which by itself is a reason many businesses go with the C corp rather than LLC to begin with.
In addition, if you ever try to sell the business (which you might down the road), you can structure the sale in a stock-for-stock swap that will allow you to drastically reduce taxes by selling the stock over time.
An LLC will never lose its pass through status, but you dont get benfits, and you cannot qualify for the stock-for-stock payout later on.
LLCs are fast becoming more common than an S corporation.
The decision is ultimately yours, and you can always change entities down the line if you feel its in your best interest.
My last bit of advice which is not part of the question; most new business owners fee its not worth it to create a buy-sell agreement , stockholder agreement, or member agreement. However, I highly highly highly recommend you pay the money and sit down with a really good small business attorney near you who will go over every decision you may not have thought of yet. Make good friends with an attorney.
Choosing the type of entity for your business is one of the most important business-start-up decisions you can make. Many people blindly choose an LLC because it is so common, but often this entity type is not appropriate. If pass through taxation and limited liability are your main concerns however, an LLC or S-Corp are your best options in MA. But just setting up the LLC or S-Corp is only half the battle to retain limited personal liability - you must maintain separate assets, bank accounts, keep up to date filings, have adequate capitalization, etc. Failure to do so - or commingling personal and business assets - could result in elimination of the personal liability protection by a court in a personal injury case (for example). That being said, there are specific differences between an S-Corp and an LLC that could make one or the other more desireable. I highly suggest you consult a business attorney in your area to assist in the entire process - generally, these types of legal services are not too expensive.
If you are setting up a business that you expect to last for years to come, I strongly suggest you allow an attorney to do it for you. It should not be prohibitively expensive, and you may save yourself the heartache and possible higher cost of having to have a lawyer fix possible mistakes which you made during setup. Using a lawyer to helpyou set up the entitly also allows you to ask all of the questions which are sure to arise at the beginning. I agree that choosing the form should be done after consulting a CPA, which will not be costly. You also want to consider a Shareholders Agreement (if a corporation) or an Operating Agreement (if an LLC) for you and your partner. This will keep the business road smooth as issues arise in the future between and among the partners. I would lean in your case in the direction of a corporation and take the s election, but, again, check with a public accountant.
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