Written by attorney Bryant Keith Martin

Should my Business be in an LLC, an LLP, an S Corp, a C Corp, a PC or a sole proprietorship?

You are starting a business or have a business that you operate as a sole proprietorship, possibly under a fictitious name (a DBA). You are concerned about liability and taxes and are considering whether it should be incorporated in some type of entity. Your choices are an LLC, an S Corp, a sole proprietorship, a C Corp, a limited partnership (LP), a limited liability partnership (LLP), or a professional corporation.

For most businessmen only the first three choices are of interest. Some counselors say you must protect yourself from liability, so you must form an LLC (the most popular and easiest entity). The threshold question is whether to incorporate (forming an LLC or an S Corp).

This is a question only you can answer. It is a tradeoff between (1) limiting your personal liability to the amount you invest in the LLC, and (2) paying to form the LLC and the taxes and fees payable by the LLC. (Consult a local lawyer as to his fees, state filing fees and taxes.) If risk is your main concern, the LLC is more advantageous; if costs, then a sole proprietorship. How risky do you think this business is?

Incorporation protects your personal assets from creditors of the entity (i.e., the LLC or the corporation) but the entity remains liable for such debts. Your first consideration should be to consult a good liability insurance agent to get coverage against claims of negligence and an auto insurance policy with substantial limits, $1,000,000 or more. An "umbrella" insurance policy with excess limits of $2,000,000 is not too expensive and may not be overkill, particularly if you have significant assets to protect.

Consider the amount of risk vs. the potential loss. A businessperson's skills should include a keen eye for value and the ability to assess the amount of risk realistically. How likely is it that one of your customers will be injured? Many injuries are covered by insurance. If your activities are relatively low-risk, corporate protection may not be necessary. You need to make that assessment as part of your decision on incorporation.

It will not help with a loan at the bank since you will have to guarantee the loan personally. If you finance with credit cards, the entity would help, but be sure the CC is issued to the entity, not to you personally. If you, the owner, were personally negligent, such as in an auto accident, then the LLC does not protectyou. You can be sued personally. Otherwise the owner should not be liable, but the plaintiff may be able to take up to and including all the assets of the LLC.

An LLC or an S corp will protect you from most liability while letting you deduct the business expenses on your personal tax return. S Corps tend to be more complicated and less flexible than LLC's. Unlike LLC's, S corps are prohibited from having nonresident aliens or C corps as shareholders, so if shares are transferred to one of them, you will lose the S corp treatment and the corp will be liable for taxes. This means double taxation.

An LLC works just as well without the tax risk. LLC's provide a bit better protection than corps, because shareholders of a corp are sometimes found liable by a "piercing of the corporate veil" due to failure to comply with corporate procedures, when combined with unjust enrichment of the shareholder. Thus far, I am not aware of any such attack on LLC's, though it could happen.

Since an LLC is usually treated as a partnership for tax purposes it has tax advantages over the two corporate business forms: C corporations and S corporation. Unlike a corporation, an LLC may specially allocate income or loss to its members in accordance with IRC 704(b) and may make disproportionate distributions to their shareholders.

Doing it is not hard: You form the entity (LLC or corp) and you contribute the business of the sole proprietorship to the entity by delivery of a Bill of Sale. You can use Avvo's bill of sale form for this. You should consult an attorney on how to capitalize the entity and why (to avoid personal liability by "piercing of the corporate veil") and keeping Minutes and records.. You should have buyout provisions in the event of death, disability or disagreement with your other members, if any. Most forms come with those provisions.

An LLP is a limited liability partnership permitted only for certain professionals, such as lawyers or doctors. A professional corporation has the same limitation. A dba is not an organization but just a fictitious name for a business operated by a different person, typically an individual. It does not provide limited liability as an LLC, a corporation or a limited partnership would.

DISCLAIMER--This Legal Guide is for informational purposes only under the AVVO system, its terms and conditions. It is not intended as specific legal advice This Guide does not establish an attorney client relationship.

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