By R.J. DeLuke
Many things have to be included in a business
plan and one of them is how to establish themselves
to limit liability, at the same time having
the right setup to reach their goals.
There are various options in that regard, and
getting professional advice can be important.
“A decision to form an LLC is complex,” said
David Kobylar, a partner with Hedley & Co. PLLC
in Clifton Park. “An LLC can be taxed in many
ways.”
James T. Towne Jr., a partner with the law firm
of Towne, Ryan & Partners PC, which has an office
in Saratoga Springs, said serious thought needs
to go into the process.
One option is becoming an “S corporation”
which is a form that allows the protection of
limited liability, but direct flow-through of profits
and losses, he said.
S corporations and Limited Liability Corporations
(LLCs) have similarities. They offer their
owners limited liability protection. The LLC, as
an S corporation,can become a pass-through tax
entity. Pass-through taxation allows the income
or loss generated by the business to be reflected
on the personal income tax return of the owners.
It eliminates any possibility of double taxation for
S corporations and LLCs.
“You have individual protection so your personal
assets are not at risk,” said Towne.
Limited Liability Partnerships can have a
single partner or more general partners and one or more limited partners. It is taxed as a partnership,
said Towne.
LLP business people participate in management
and have liability for partnership obligations.
They receive a share of the profits for their
involvement as limited partners.
Deciding on a partnership agreement or shareholders
agreement is important, said Towne. It
defines what the rights and responsibilities are
of the partnership.
“Some don’t cross their Ts and dot their Is,” in
forming a partnership agreement. The specifics
have to be looked at carefully. The issues involved
have to be narrowed to enure they are appropriately
addressed.
Another aspect of the S corporation is that it
has no limit on its existence, while LLCs typically
have limited life spans.
“An LLC is a good entity choice for most businesses
because they have the most flexibility from
a tax standpoint,” said Kobylar. “They can elect to
be taxed as they want.”
Determining which entity is best for a business
depends on specific considerations, including tax
consequences, the nature of the business, management
control, and other factors that apply to
a particular business.
Towne said insurance for each instance is also
important. “You want to know how much insurance is going
to make you comfortable,” he said. “No matter what entity you run your business as, you always have liability.”
He said another consideration for the business
is “where is that entity going” in the future? “There
should be some design. What’s your exit strategy?”
“You need to ask, ‘What is the end game for this
entity? … This also drives, in some ways, how you
are setting it up.”
Kobylar agreed. “As the business grows and
things change, it may make more sense to be
taxed differently. You can change how you’re taxed
without changing your legal situation.”
“It’s not an easy decision to figure what a client
should be taxed as,” he noted. “What’s in the
crystal ball? What’s in the future?”
He said consultants need to consider issues
like: Is it a fast-growth company; how many
employees; what is the tax liability; does it take
a while for cash to start flowing in or is it a cash
cow business?
“As a company makes transitions over time, it’s
easier to change how you’re taxed,” Kobylar said.
An LLC can also be easier to devise than a
corporation. “Corporations have very stringent
legal rules” that can be tedious and costly and
that LLCs can avoid, he said.