One of the first decisions that any businessperson has to take when forming a new company is deciding which type of entity it is going to be. A business attorney can be a great resource for information on this topic, since attorneys know all of the ins and outs regarding tax loopholes and other legal ramifications when forming certain types of businesses. Traditional corporations, LLCs, S corporations, and non-profits all have their own unique benefits and drawbacks, according to Andrew Thompson of the Thompson Law Firm. A business attorney in Carmel, Indiana, Thompson regularly works with entrepreneurs and helps them set up new businesses.
Although a traditional corporation can be set up very quickly—something that Thompson sees as a major benefit—the downside is that traditional corporations do not offer people as much flexibility as LLCs. The limited liability corporation is a type of entity that was created by the legislature to be very broad in scope, explains Thompson. In the majority of cases, forming an LLC is a good option for a new entrepreneur looking to get started with his business right away.
Forming an LLC is not necessarily always the best answer though, since that increased flexibility can lead to the need for more drafting to be done when putting together the company’s operating agreement. Still, Thompson says that if a business is going to have a complex board governance, then an LLC may still end up being a faster option as compared to setting up a traditional corporation.
When he works with clients as a business attorney in Carmel, Indiana, Thompson always takes taxation issues into consideration. The assets that a person needs to protect and which of those assets will be protected under each type of entity are major concerns that people need to take into account.
With this in mind, Thompson often advises his clients to get a good tax advisor’s input when determining the type of entity to choose. A C corporation and an S corporation, for tax purposes, both offer unique benefits that should be discussed in depth with an accountant before forming any type of company.
Thanks to the many benefits that come with operating a non-profit business, Thompson explains that he also brings up the topic of staying away from forming corporations altogether and instead forming non-profit entities. Many people incorrectly assume that because they pay themselves salaries and because their businesses make money, they cannot be labeled as non-profits. What they don’t realize, however, is that there are a number of advantages to forming a non-profit that may make the decision a lucrative one for everyone involved.
The financing of the corporation is another important factor that Thompson takes into consideration when advising clients on how to incorporate their businesses. How much equity the business owner is planning on putting in, who the holders of the equity will be, and how much debt the equity holders will be taking on initially all are used as factors when determining the next step to take. Certain types of entities are far better at protecting personal assets from prospective business creditors than others, and it is important that people know what they are getting into before putting themselves at risk.
Once the basics have all been determined, Thompson says that it is time to get down to the more functional issues in the start-up of a corporation, such as how large the pool of investors will be and how fast the business can reasonably be expected to grow in the near future. The answers to these questions will dictate whether or not the business can be an S corporation, because an S corporation is limited to 70 shareholders under a single class of stock, and nothing more.
As soon as all of these questions have been answered and the decisions have been sorted out, Thompson says that he can get to work at filing the paperwork for the actual formation of the business entity—whether it is an S corporation, a traditional corporation, a non-profit, or even an LLC.
This article is for informational purposes only. You should not rely on this article as a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel. Publication of this article and your receipt of this article does not create an attorney-client relationship.