Choosing A Legal Structure: An Important First Step to Business Format

During the COVID-19 pandemic, everyone has spent more time inside their homes than in the pre-pandemic world. During this extended period of time in the home, creativity may have sparked an idea for a business, or given extra motivation to act on a pre-existing idea. Now, you are excited and ready to form a business. One of the most important decisions to be made at an early stage is how to register the business with the State of North Carolina, as well as deciding which type of legal entity the business will be. This article will focus on a high-level overview to assist in making these decisions.

First, in any business that is not a sole proprietorship or partnership, the entity will need to be registered with the North Carolina Secretary of State. The entity can be created and registered as any of the following: Limited Liability Company (LLC), Limited Liability Partnership (LLP), Corporation (can be either C-Corp or S-Corp), Nonprofit Corporation, Limited Liability Limited Partnership (LLLP), Limited Partnership (LP), Professional Corporation (PC), or Professional LLC (PLLC).

The Limited Liability Company (LLC) is a popular choice for individuals starting their own business, due to its attractive features such as limited liability (hence the title Limited Liability Company) and pass-through taxation. Limited liability is simply the notion that a member of the LLC is only liable up to the amount of their personal contributions. Since the LLC is a separate legal entity, the personal assets of any individual member cannot be reached to pay the debts and obligations of the LLC. Thus, for new businesses and individuals chasing their dream of opening a business, the notion of limited liability is quite comforting. In regards to taxation, an interesting wrinkle is that the LLC is not taxed on its income. Instead, the members of the LLC are taxed on its income, as the tax is “passed through” to the members. It should be noted that an LLC can choose to be taxed as a corporation, and therefore would no longer enjoy the benefit of pass-through taxation.

At first glance, it can be overwhelming deciding which legal structure your business will be. Factors to consider when choosing a legal structure include tax benefits, degree of personal liability, and management structure. In order to illustrate this more clearly, for example, if a major factor in choosing an entity is the best tax benefit without much regard for other factors, it may be beneficial to form an LLC, LLP, LP, or LLLP . However, if you are searching for a structure in which you will not be personally liable for any obligations of the entity, then perhaps electing to create an LLC, LLLP, or Corporation is the right decision for you. All factors should be weighed in order to determine the best overall legal structure for your goals and needs.

The attorneys at Hannah Sheridan & Cochran, LLP have extensive experience in assisting clients with business formation. Please contact us to assist you in turning your idea into a legally registered business with the North Carolina Secretary of State.

By: Zachary N. Layne