5 Things to Know About Entity Selection
So you’re starting a business? Here are some threshold things to consider when choosing the entity:
- Often the choice is between an S corporation and a limited liability company, which is a type of partnership with liability protection. Both are considered “pass-through entities” for tax purposes.
- Both entities provide the same protection against the company’s trade creditors, assuming the business is properly operated.
- Generally, neither entity protects its principals from personal liability for negligence or misconduct of either the principals or their direct reports, so insurance is vital.
- Private equity and other institutional investors typically invest only in corporations; and converting a corporation into an LLC can be a tax nightmare. So measure twice and cut once.
- Where there is more than one owner: if the entity is an LLC you will need a detailed Operating Agreement, and if the entity is a corporation, you will need a Shareholders’ Agreement—in both cases including buy-sell terms.
The above is not a complete list. There are many other points to consider. Together with your accountant, we can help you choose and organize your entity. Visit www.plessandsauro.com for more helpful tips.