This document discusses different types of business entities and factors to consider when choosing an entity for a client's business. It covers liability, costs, and control associated with sole proprietorships, general partnerships, limited partnerships, limited liability partnerships, corporations, and limited liability companies. For each entity type, it provides a brief description and assessment of suitability based on the three factors. The top takeaways emphasize that sole proprietorships and general/limited partnerships generally should be avoided due to unlimited liability and high capital costs, while limited liability companies and corporations are more flexible and protective options for most businesses.

1. 1Lexis Practice Advisor®
Lexis Practice Advisor®
Business & Commercial
Choosing a Business Entity:
What’s the Right Fit for Your Client?

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WHERE DO I BEGIN WHEN CHOOSING AN ENTITY?
Three basic questions:
1. LIABILITY
2. COST
3. CONTROL

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LIABILITY

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LIABILITY
• To help you determine the best choice of
entity, assess your client’s risk of liability.
• Your client’s appetite for dealing with legal
paperwork and statutory formalities also
factors into the liability analysis.
• Liability insurance is an option.

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COST
COST
MaintenanceEntry
Taxes Capital

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COST – 4 Factors
1. Entry Costs
•Filing Fees (State)
•Filing Fees (Federal)
•Licenses, Registrations and Permits
•Publication Requirements

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COST
2. Maintenance Costs
•Upfront vs. Long-Term Considerations
•Annual Reports /Statements of Information

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COST
3. Taxes
•Taxable Entity
•Pass-through or Conduit Entity
•Not-For-Profit Entity

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COST
4. Raising Capital
•General Partnerships → Limited Ability
•Limited Liability Companies → Limited Ability

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CONTROL

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CONTROL
• Ownership structure is key
• The number of owners drives
business entity choice
• Control has both external and internal
importance
o External: Third party perception
o Internal: Flexibility and predictability
among owners

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REMINDERS…
It’s a balancing act!
Do your state homework!

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Sole Proprietorships
Step 1 – What is it?
Step 2 – Liability → Unlimited
Step 3 – Cost → Minimal Entry and Tax,
High Capital
Step 4 – Control → Maximal

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Sole Proprietorships
Scorecard
Best Suited For:
• A sole proprietorship would be a good choice for
someone who is looking to start a one-person
business quickly and at a low entry cost. Their
business should not have excessive outside
investment needs and should be extremely low-risk.
o Example: Assuming they could procure outside
malpractice insurance, an accountant may
choose the sole proprietorship form of entity.
LIABILITY COST CONTROL
- +/- +

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General Partnerships
Step 1 – What is it?
Step 2 – Liability → Unlimited
Step 3 – Cost → Minimal Entry and Tax,
High Capital
Step 4 – Control → Maximal

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General Partnerships
Scorecard
Best Suited For:
• A general partnership would be a good choice for
two or more individuals who are looking to start a
business quickly and at a low entry cost. Their
business should not have excessive outside
investment needs and should be relatively low-risk.
o Example: Assuming they could procure outside
malpractice insurance, an accounting firm may
choose to operate as a general partnership.
LIABILITY COST CONTROL
- +/- +

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Limited Partnerships
Step 1 – What is it?
Step 2 – Liability → Both Limited and Unlimited
Step 3 – Cost → High Entry, Low Tax and Capital
Step 4 – Control → Maximal

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Limited Partnerships
Scorecard
Best Suited For:
• A limited partnership would be a good choice for a
business in which there is a clear division between those
providing labor and those providing capital. It would also
be a good choice for a one-off venture or a venture that is
limited in duration.
o Example: Real estate ventures are often organized as
limited partnerships. Typically, an experienced
property manager or developer serves as the general
partner and outside investors provide financing for
the project in exchange for a share of ownership as
limited partners.
LIABILITY COST CONTROL
+/- +/- +

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Limited Liability Partnerships
Step 1 – What is it?
Step 2 – Liability → Limited
Step 3 – Cost → High Entry, Minimal Tax,
High Capital
Step 4 – Control → Maximal

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Limited Liability Partnerships
Scorecard
Best Suited For:
• A limited liability partnership would be a good
choice for a professional service business that
requires a state license in order to operate.
o Example: Groups of attorneys, architects,
chiropractors, dentists and doctors are often
organized as limited liability partnerships.
LIABILITY COST CONTROL
+ - +

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Corporations
Step 1 – What is it?
Step 2 – Liability → Limited
Step 3 – Cost → High Entry, High Tax,
Minimal Capital
Step 4 – Control → Mixed
• Transparency in Governance (+)
• Transferability of Ownership Interests (+)
• Compliance (-)

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Corporations
Scorecard
Best Suited For:
• A C corporation would be a good choice for a business that
requires strong liability protection and will be seeking venture
capital financing in the near future. If the owners will initially
be investing significant amounts of their own money and
would like to write off losses (i.e. via a pass-through
structure), then an S corporation may be considered.
o Example: A startup tech company that is looking to
become the next social media success would likely choose
the corporate form.
LIABILITY COST CONTROL
+ +/- +/-

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Limited Liability Companies
Step 1 – What is it?
Step 2 – Liability → Limited
Step 3 – Cost → Minimal Entry, Minimal Tax,
High Capital (but changing)
Step 4 – Control → Maximal

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Limited Liability Companies
Scorecard
Best Suited For:
• A limited liability company would be a good choice for a
business that (i) needs liability protection, (ii) wants to
avoid dual taxation, and (iii) requires flexibility with respect
to how the business is managed and allocations are made.
o Example: LLCs are ideal for real estate companies,
because each separate property can be owned by its
own, individual LLC, thereby shielding not only the
owners, but their other properties from cross-liability.
LIABILITY COST CONTROL
+ +/- +

25. 25Lexis Practice Advisor®
Top 5 Takeaways from Today’s Presentation
1. Sole Proprietorship – Should generally be avoided by entrepreneurs due to
unlimited personal liability and high capital costs.
2. General and Limited Partnerships – Similar to a sole proprietorship and should
generally be avoided by entrepreneurs due to unlimited personal liability and high
capital costs. Limited partnerships may come into play in specific types of deals,
but will generally not be used otherwise.
3. Limited Liability Partnerships – Solid choice for the professional business.
4. Corporation – A corporation should be the first choice for an entrepreneur that
will be seeking venture capital financing. Trade compliance burden for liability
protection.
5. LLC – Because of their flexibility, tax benefits and liability shield, LLCs are a very
attractive option for many types of businesses, assuming venture capital financing
is not needed.

26. 26Lexis Practice Advisor®
Q&A Session
Rob Cortes, Esq.
LexisPracticeAdvisorCLEs@lexisnexis.com
www.lexisnexis.com/practice-advisor