Different Types of Business Structures
With several ways to structure a business in Louisiana, choosing the best structure for your business can seem like a difficult task. Here are a few things for business owners to think about and discuss with their legal counsel when structuring their business entity.
Sole Proprietorships may be easy, but there are a lot of risks that come along with running this type of business. There is no separation between the business owner and the business. The business owner is personally liable for the business’s debts, including any damage awards in case of an accident. In addition, this structure is a one-person show, so there is no easy avenue to bring a successor or other people into the business without reorganizing the business’s structure. This has substantial implications because in the event that the business owner dies, so does the business. With the added chaos that divorce or permanent disability can bring, it is usually beneficial to look at other types of business entities.
Partnerships are also easy to form, but like sole proprietorships, they do not offer limited liability. Not only is the business owner personally liable for everything he does, he is also liable for everything his partner does. People going into business together should be proactive and talk to their attorney about what type of entity to form. Partnerships do not have to be formalized in writing and can be entered into inadvertently or even accidentally. It would not be pleasant to find out that your personal assets are on the line due to your partner’s reckless actions. Therefore, the risk to your personal assets may be substantial if you do not act prudently in selecting a business partner.
Limited Partnerships are slightly more complicated. There are documents that must be filed with the Secretary of State and rules that must be followed, including that the limited partners must not actively participate in the day-to-day management of the business. This structure is most commonly seen in investment funds, venture funds, and other companies focused on raising and investing capital. The limited partners who invest their capital into the company get a percentage based on their ownership interest in the company, but they have no personal liability. There still must be general partners, though, and these people are personally liable for the partnership’s debts. The general partners face the same personal asset risks as outlined for partnerships.
Corporations (sometimes referred to as C Corporations or C Corps) are the most expensive and complex business structure to form. The company becomes a separate legal person/entity that can enter into contracts, buy and sell property, and sue and be sued. Shareholders own the company and elect the Board of Directors to manage it. While shareholders have the benefit of limited liability and are generally not held liable for the debts and liabilities of the corporation, this comes at the cost of double taxation. The corporation is taxed on the money it makes AND the shareholders are taxed on the money they receive from the corporation. Due to the increased administrative requirements, additional costs, and more advantageous tax strategies associated with LLC’s and S Corps, corporations are often not the best approach.
S Corporations (S Corps) are a specific sub-category of corporations that receive more favorable tax treatment because the shareholders can elect for pass-through taxation. Thus, instead of both the shareholders and the corporation being taxed on the same earnings, only the shareholders would be taxed on the money they receive from the corporation. This structure is less flexible and customizable than the LLC, and there are particular requirements about which companies can opt for S Corp status, including the type and number of shareholders. You will likely want to evaluate compliance with these requirements before forming an S Corp.
Benefit Corporations (B Corp) are a new type of entity in Louisiana that requires some additional administrative work and cost as compared to a standard corporation. This entity allows the corporation’s management to take non-economic considerations into account, including the impact on the environment or the promotion of the arts. This may be the right entity for you if your company is planning to go public and you would like the company’s decision-making to be primarily guided by values and social good rather than just profit generation. Be aware, you will still face double taxation and all of the additional expense and administrative requirements associated with a corporation. So be sure to talk with your attorney about whether a B Corp is really the best option for you.
The Limited Liability Company (LLC), with the pass-through taxation of a partnership and the limited liability of a corporation, is a business structure that combines the best of both worlds. As an added advantage, it is highly customizable. To maximize your benefit from this entity structure, don’t overlook the importance of an Operating Agreement, as some of the default rules in Louisiana are not favorable to business owners. A well written Operating Agreement clarifies the management and control of the company and can be an effective way to avoid costly litigation.
Low-Profit Limited Liability Company (L3C). Along with the B Corp, Louisiana has recently allowed for the creation of Low-Profit Limited Liability Companies. While these companies are certainly allowed to turn a profit, the main drive behind the company must be a charitable or educational purpose, and your attorney can analyze your business model to determine if this would be an appropriate structure for you. Along with the pass-through taxation, limited liability, and the extensive flexibility inherent in an LLC, structuring your company as an L3C may make it easier to receive Program Related Investments (PRIs) from charitable foundations and trusts. If this is a viable source of funding you anticipate trying to get for your company, the L3C may be the best structure.
The Take Away
Protecting yourself, protecting your business, and creating a pathway for growth and financial success are key goals of strategic business planning. There are numerous considerations to evaluate in choosing a business entity, and your lawyer and accountant can help you make that decision.
Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.