The Common Law

Consider an LLC?

My friend and I plan to start a business selling products online. We are looking into options to create a formal business entity but are not sure whether partnership or corporation is the way to go. Any ideas?

The circumstances and desired outcomes of each new business will dictate which business structure is most appropriate. As last week's column discussed, general partnerships and corporations each offer their own specific benefits and drawbacks.

Partnerships are easy to form, and the partners typically report the business profits and losses on their personal tax returns. Unfortunately, general partners are personally liable for the debts and obligations of the partnership, which means you can be sued personally in your role as general partner. Alternatively, creating a corporation provides protection from personal liability (the corporation is recognized as a separate legal entity liable for its own debts and obligations). But corporations are much more difficult to form and are taxed directly, which can create a lengthy list of tax issues that can be unfavorable.

Another option you should investigate is forming a limited liability company. An LLC is neither a corporation nor partnership; rather, it is a distinct type of entity that shares the characteristics and powers of a corporation and a partnership. For example, an LLC provides the same protection from personal liability as a corporation. But unlike a corporation, an LLC is not always required to be a separate tax entity. This means the LLC can serve as a "pass-through entity" so that LLC owners report their business profits or losses on their personal tax returns, similar to a general partnership. In some situations, LLCs offer additional tax advantages, including the possibility of more deductions. Forming an LLC, which requires filing with the Texas Secretary of State's office, is more difficult than a general partnership, but less complicated than forming a corporation.

You should investigate whether an LLC is right for your new business. Be sure to talk to a lawyer and accountant to learn what option is best for your new business! Read next week's "The Common Law" to learn the basic steps to forming an LLC.