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Proper entity selection an important decision when starting a business, P.2

Last time, we looked very briefly at some of the basic characteristics of sole proprietorships and partnerships, noting the importance of entity selection in business planning. Both of these types of business entities are relatively simple to set up compared to limited liability companies and corporations.

A limited liability company has some of the features of a partnership and some of the features of a corporation. Owners, called members, of limited liability companies have the same liability protection as owners of corporations. LLCs, however, are taxed like partnerships and provide the same flexibility of management as partnerships. LLC formation requires filing a Certificate of Organization with the state along with other documentation, and LLCs are required to register with the state on an annual basis. 

Corporations are the most complex type of business form, with respect to formation, structuring, management and various other aspects. Corporations offer limited liability, central management and the ability to raise capital by issuing stock. Corporations can be taxed one of two ways: either as entities separate from its owners—which is the default—or by a special election for “pass-through taxation.”

By default, corporations are taxed separately from their owners, which means that dividends paid to shareholders are taxed twice. Corporations which opt for pass-through taxation, though, do not pay taxes as a separate entity; rather, shareholders pay taxes in proportion to their share of ownership. There are advantages and disadvantages to both approaches.

To form a corporation, Articles of Incorporation and other documentation must be filed with the state.The Articles of Incorporation define the structure of the business, and must be carefully considered before filing, as is the case with any business formation documentation.

Because of the complexity corporate formation can present, it is advisable to work with an experienced attorney in such matters. Sound legal guidance is necessary, to be sure, in the formation of any business entity, not only to ensure formation is done carefully and properly, but also to ensure informed and effective planning for the future success of the business. 

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