SELECTING A CORPORATE FORM: CORPORATION, LIMITED PARTNERSHIP OR LLC?
Oregon entrepreneurs excited about launching their new businesses should carefully evaluate the different company structures available to them.
Getting a new company off the ground can be an extremely exciting and energizing experience. Every day, Oregon entrepreneurs come up with ideas for new ventures that they may be able to build viable companies around.
In addition to developing product or service ideas and go-to-market strategies, business owners must decide how they want to structure their new companies. This choice may seem daunting but the time to evaluate each option is now. Deciding the structure of your company will effect significant future strategies, like financing, succession and corporate control. Many new business owners decide to forgo the formalities, opting instead for inexpensive, “simple” online corporate registration. The consequences of going this route are best described as “doing your own dental work.”
The basic choices
The Secretary of State (or Corporation Division, as it is often called) explains that there are many different forms of business models. The most basic is the sole proprietorship- going “bare”. Simply going without corporate form, provides no insulation to liability, and no tax benefit. If you are going into business with someone else, your venture is treated as a partnership, by default under law. Without the benefit of a partnership agreement, the way you conduct business, and your relationship with your partner is defined by default, by statue. If you did not perform certain corporate “formalities” you still will be exposed to potential contract and tort liability.
The main reason for selecting a corporate form is to limit liability and to define responsibilities among members of the venture. Properly formed, the limited liability company, the Limited Liability Partnership, the corporation all offer protection and structure. The question is which is best suited to your intended activity – Real estate, manufacturing, consulting. The relationship between the venturers, also, is a crucial question.
Both LLCs and corporations are considered either domestic or foreign entities. This means they may be formed locally, or in another state and registered to do business in the local state. If filed out of state, the company will need to request approval from the Oregon Business Registry to do business in the state.
Limited Liability Partnerships (LLP’s) are another corporate entity which is less formal than a corporation and closer to an LLC. The rights duties and obligations of the Limited and General Partners are set out in a Limited Partnership Agreement.
Who’s in Charge Here?
One of the first, and most important decisions, will be deciding how the entity is actually run. In a traditional corporation, the executive functions are well defined – President, Secretary, Treasurer, etc… with specific rules about election, duties and reporting. An LLC is a cross between a partnership and corporation. The roles in the LLC may be exercised by all members (like a partnership) or reserved to the Managing Member (like a company). Defining the structure can avoid costly and difficult issues later. LLP’s are suited to certain situations (like a family owned asset or business) where certain family members may be operating the entity, while others are silent partners.
Business owners understandably are justifiably concerned about taxation which can directly affect the profitability and even cash flow of a company. While there is always a cost to doing business, how a company is taxed may contribute to an increase or decrease in that cost. Like business counsel, it is unwise to try and do your own tax planning. Coordination between your accounting professional and your business attorney will result in the structure and tax profile which is best suited to your new venture.
Looking beyond taxes
Forbes urges people not to focus solely on taxes when making an entity selection. The choice in business model will directly affect how the business can be run and even who can be involved.
Getting professional input
Before deciding how to set up a new business, you should always consult with an experienced business attorney. This will give people the ability to discuss their specific business needs with someone who can explain the detailed pros and cons about each option.