Which Business Entity is Right for Your Raleigh Company?
Choosing the right North Carolina business entity is an important step in starting or growing a company. Choosing one type of business entity over another can affect liability exposure, taxation rates, management choices, and financing opportunities. Oftentimes there is no clear choice and a detailed analysis of the goals and expectations of the business must be analyzed. Similarly, when a business changes or evolves over time, it may be advantageous to modify or change the selected entity. There are many types of business entities in North Carolina, including:
– Sole Proprietorships
– Limited Partnerships (LP)
– Limited Liability Partnerships (LLP)
– Limited Liability Companies (LLC)
If you need assistance deciding which entity may be best for you, or are contemplating modifying an already existing company, call or email the Raleigh attorneys of Maginnis Law PLLC. Our lawyers regularly handle business issues in Raleigh, Cary, Apex, and throughout Wake County, Durham County, Johnston County and the surrounding areas of the Triangle. Because we represent companies in business litigation, we have the experience to help you protect yourself on the front-end from such suits. Contact the firm at 919.526.0450 or visit our contact page here.
Initial considerations must focus on the number of owners who will be involved in the business. Single owners are obviously precluded from operating as a Partnership, LP, or LLP, but can operate as a sole proprietorship, corporation, or LLC. Other than sole proprietorships, two or more owners can operate every other entity.
Some of the factors to take into consideration when choosing the right entity include:
– Costs of operation
– Attraction to investors
– Tax advantages and avoidance of double taxation
– Personal liability and exposure to risk
– Ownership issues
Sole proprietorships and partnerships have no legal distinction from the owners. Because of this, the owners are liable for all debts and obligations of the company. This means that if they are sued, their personal assets are not protected from execution by a sheriff. The owners also report all income and expenses on their own income statements.
Corporations are separate from their owners for both legal and tax purposes. In North Carolina, a corporation is formed by filing Articles of Incorporation with the Secretary of State. A main objective of incorporation is to create a separate corporate entity apart from the operators. Having a separate legal entity gives protection to shareholders in ways general partnerships and sole proprietorships cannot. Corporations can either be taxed under Subchapter C of the Internal Revenue Code (a “C” Corporation) or under Subchapter S of the Internal Revenue Code (an “S” Corporation). The biggest disadvantage of a corporation is taxation. The corporation is taxed both at the entity level and will be taxed again if dividends are distributed to shareholders. “S” Corporations can oftentimes avoid much of this double taxation if set up properly.
A limited liability company (LLC) is formed in North Carolina by filing Articles of Organization with the Secretary of State. Depending on the number of members, an operating agreement may need to be prepared. These typically should be filed with the expertise and guidance of an attorney. LLC’s can be beneficial for three main reasons. First, a limited liability company, as its name implies, typically provides members with limited liability protection for their personal assets. Secondly, there is no “double taxation” as is the case with many corporations. Third, an LLC offers significant flexibility in the management of the business because it can be managed by its members, by one or more managers, or by its members and officers.
Limited Partnerships (LPs) divide the partnership into two categories, one or more “general partners,” and one or more “limited partners.” General partners are responsible for managing the operations and are liable for all the debts and obligations of the partnership. Limited partners are prohibited from taking part in the management of the operations, but will not generally be personally liable for the debts and obligations. LP’s requires a written partnership agreement which can be quite complicated and oftentimes requires the assistance of an attorney. LLP’s are partnerships reserved for certain licensed professionals such as attorneys, accountants, architects, and medical professionals. Partners in a LLP are generally not liable for the debts and obligations of the partnership for certain negligence or wrongful acts, but will be liable for their own negligence and wrongful acts.
If you are contemplating forming or modifying a business, or if you have a potential business dispute, contact the business litigation firm of Maginnis Law, PLLC at 919.526.0450 or submit a new case inquiry here. The firm’s civil attorneys represent all types of business entities and offer free initial consultations for business inquiries.