Your SlideShare is downloading. ×
  • Like
Pros & Cons of available legal structures for business entities
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×

Now you can save presentations on your phone or tablet

Available for both IPhone and Android

Text the download link to your phone

Standard text messaging rates apply

Pros & Cons of available legal structures for business entities

  • 1,257 views
Published

Nowadays anybody can conduct business under one of the following legal structures: Sole Proprietorship, General Partnership, Limited Partnership, Limited Liability Company, Corporation and S …

Nowadays anybody can conduct business under one of the following legal structures: Sole Proprietorship, General Partnership, Limited Partnership, Limited Liability Company, Corporation and S Corporation. The efficiency of any of these structures depends on the type of the business and the goals of its organizers (for example, how much managerial flexibility is required, whether the owners need to protect their personal assets from the liability incurred during the business operations, cost of formation of various types of companies, taxation, etc.). The business organizers should carefully compare various legal structures in order to determine which one will be the most beneficial for their business activities. Here I present the basic characteristics of each legal form for business enterprise for your review and consideration.

Published in Business
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
No Downloads

Views

Total Views
1,257
On SlideShare
0
From Embeds
0
Number of Embeds
0

Actions

Shares
Downloads
26
Comments
0
Likes
1

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. The Law Firm of Ekaterina Mouratova, PLLC154 Grand StreetNew York, NY 10013Tel.: (212) 203-2406Fax: (212) 279-9743Email: info@mouratovalawfirm.comwww.mouratovalawfirm.comBusiness ImmigrationIntellectual Property Real Estate
  • 2. Choice of Legal Form forBusiness Entities© 2012 The Law Firm of Ekaterina Mouratova, PLLC
  • 3. Available Business Structures• Sole Proprietorship• General Partnership• Limited Partnership• Limited Liability Company• Corporation• S Corporation• Not-for-Profit Corporation© 2012 The Law Firm of Ekaterina Mouratova, PLLC
  • 4. Issues to Consider• One member or multiple partners• Flexibility in daily operations of the company• Voting and managerial rights of the partners• Protection of organizers’ personal assets frombusiness liability• Need to raise capital• Taxation© 2012 The Law Firm of Ekaterina Mouratova, PLLC
  • 5. Sole ProprietorshipBusiness activities are not separated from the individual owner.Best suited for single-owner business that does not have tax concerns and for which potentialproduct and/or service liabilities are minimal.Pros:• An owner has sole control over the business• Simple and inexpensive to create and operate• The income, deductions, expenses are paid by the owner. He / She reports the said onhis/her personal income tax return. The company is disregarded as an entity for taxationpurposes*Cons:• Owner has unlimited personal liability for business activities and the creditors can go afterthe owner’s personal assets in order to satisfy the debt• Access to capital and other business resources is limited by owner’s assets or ability to getloans• The business operations are wholly dependent upon the owner’s performance (risky in caseof the owner’s illness or other inability to continue working)*except that New York City imposes an “unincorporated business tax” of 4% on earning of$135,000 or more; no tax on earning less than $85,000; sliding scale between© 2012 The Law Firm of Ekaterina Mouratova, PLLC
  • 6. General PartnershipThe company is not separated from its owners and the partners are personally liable for the thebusiness activities.Best suited for the multiple owners, all of whom are going to manage the company andpotential product and/or service liabilities are minimal for their type of business.Pros• Simple and inexpensive to create and operate• The company does not pay taxes. Income, deductions and credits pass through to eachpartner in portions set forth in a Partnership Agreement and then each partner pays applicabletaxes on his/her personal income. Except New York City imposes an “unincorporated businesstax” on partnerships located in the City*Cons• Partners are personally liable for business debts and lawsuits, most importantly, includingthe actions of other partners• Hard to remove and/or change partners without dissolving the partnership unless otherwisespecified in a formal agreement. The entire business venture dissolves upon separation of asingle partner, making it difficult to deal with an uncooperative partner*except that New York City imposes an “unincorporated business tax” of 4% on earning of$135,000 or more; no tax on earning less than $85,000; sliding scale between© 2012 The Law Firm of Ekaterina Mouratova, PLLC
  • 7. Limited PartnershipHas two or more owners at least one of whom is a general partner and one is a limited partner.The company is a separate legal entity from its owners.Best suited for two or more owners, at least one of whom seeks a passive investment with noparticipation in daily management of the company.Pros• The company does not pay taxes. The taxes are reported and paid by each partner separatelyon his/her personal income (except New York City’s “unincorporated business tax” if apartnership is located in NYC and earns more than $85,000).• Liability of a limited partner can be limited to the extent of his/her investment to the company,but his/her personal assets are safe• Limited partners do not participate in managementCons• General partners are personally liable for business debts and lawsuits, including the actions ofother partners.• Hard to remove general partners without dissolving the partnership unless otherwise wasagreed upon and formally documented, making the partners to be dependent on each other’scooperation© 2012 The Law Firm of Ekaterina Mouratova, PLLC
  • 8. Limited Liability CompanyBusiness is a separate legal entity from its owners.Best suited for single or multiple-owner company needing liability protection and single-leveltaxation.Pros• Liability is limited to the extent of owner’s investment, his/her personal assets are protected• Profits and losses may be allocated differently than owners’ contributions upon agreementbetween them• Capital can be raised through the sale of company interest• The entity does not pay taxes. The income, deductions and credits are applied to the membersin portions set forth in an LLC Agreement and they report it on their personal income tax returns.But the members are taxed on allocations, not distributions of the profits, meaning they own taxeseven if they decided to reinvest the profits rather than take it for themselves. Exception is an“unincorporated business tax” imposed by New York City if an LLC has more than one ownerCons• Can be difficult to raise capital – the sale of membership interests in an LLC can createconcerns/challenges for investors (not everybody wants to became an LLC member)© 2012 The Law Firm of Ekaterina Mouratova, PLLC
  • 9. CorporationBusiness is a separate legal entity from its owners. The owners are referred to as shareholders.Best suited for single or multiple-owner business seeking both limited liability and establishedprocedures for management and funding.Pros:• Limited owner liability for business debts and lawsuits (only liable in certain situations whenowner’s activities are egregious). Liabilities are limited by the company’s assets andshareholders’ personal assets are protected• Capital can be raised through the sale of stock rather than looking for a bank or personalloans• Tax deductible fringe benefits, including health insurance and retirement plansCons:• Many administrative formalities in managing the company (mandatory shareholders anddirectors meetings, documentation of every major decision and maintenance of records)• Double-taxation – a corporation pays taxes on earnings as an entity, and then shareholderspay personal income tax on any distributions (dividends) to them from the company.© 2012 The Law Firm of Ekaterina Mouratova, PLLC
  • 10. S CorporationGenerally it is a closely-held company.Best suited for smaller or family business seeking to avoid double-taxation imposed on a corporateentity, but preserve limited liability and established procedures for business operations andfunding.Pros:• All advantages of a regular corporation, plus• Only one level of taxation - the company does not pay taxes on income, only shareholders paypersonal taxes, but they own taxes on business income even if the profits are not distributed tothem, but left in the company.*Cons:• May not have more than 100 shareholders and cannot publicly trade its shares• Non-resident aliens cannot be shareholders• Generally, another corporation, an LLC or a partnership cannot be a shareholder• Administrative duties may be complex for small business owners to set up, operate anddismantle the company*Except that New York City does not recognize S-Corporation status for NYC tax purposes and anS-Corporation must pay entity-level NYC tax if the business is located in New York City.© 2012 The Law Firm of Ekaterina Mouratova, PLLC
  • 11. Not-for-Profit CorporationManaged by board of directors, trustees, and/or employees. No shareholders or investors. A corporation has apublic purpose and all income and profit is permanently dedicated to that purpose and may not be shared withprivate persons.Best suited for a business organized for charitable, educational, artistic, scientific or religious purpose.Pros:• Corporation does not pay income tax• Donations made to a 501(c)(3) not-for-profit corporation are tax deductible for the donor• Tax deductible fringe benefits, including health insurance and retirement plans• Sales and property tax exemptions may be available• Managers liability for business obligations is limited – lawsuits are brought against the company rather than theindividualsCons:• Any profit which a not-for-profit corporation earns on the products/services it provides or on the investments itmakes must be applied to the operation of the corporation and cannot be distributed to its members, officers,directors.• Expensive and difficult to create – requires many additional filing with IRS to obtain a tax exempt status• Administrative duties may be complex to set up, operate and dismantle the company• No shareholders. Corporate assets are deemed to be owned by the public (upon dissolution of corporation, itsproperty must be transferred to another not-for-profit corporation or to the state).© 2012 The Law Firm of Ekaterina Mouratova, PLLC