You’ve worked hard to build your business, and now it’s time to make sure your assets are protected. If you want to pass down generational wealth in the form of your business, there are tax and legal strategies that you need to know. In this blog, you will learn how to protect business assets by assessing which type of entity is right for you.
To learn more about how to set up or switch your business to be the most legal, protected, and cost-effective, register for a WealthBuilders free webinar on June 22, 2023 at 4:00pm MT with attorney Bill Bronchick. You can register here in advance.
The 4 Major Types of Business Entities
Setting up the correct type of business entity is crucial for protecting and maximizing your business. If you already have a business(es), it’s never too late to change your entity if another type works better for you (though, depending on the switch, it could get expensive and complicated.)
1. Sole Proprietorship:
As defined by the IRS, a sole proprietor is someone who owns an unincorporated business by himself or herself. Here are a few things to know about a sole proprietorship:
- No formalities
- No annual filing requirements
- Pay self-employment tax on earnings
- Report income taxes on 1040 Schedule C
- Unlimited Liability for self and employees
- When you die, your business dies
2. General Partnership:
A general partnership is a business arrangement with two or more individuals who agree to share responsibilities, assets, profits, and liabilities. They are unincorporated, so they don’t need to register with the state to function legally. General partnerships are:
- Formed by two or more parties entering into a business relationship to share profits and losses
- Can be informal-oral agreement
- Can be formal-written agreement
- Files partnership tax return (Form 1065)
- Is a “pass-through” entity
- Unlimited liability for self, partners, and employees
- Death of a two-person partnership ends the entity
3. Corporation:
Unlike sole proprietorships and general partnerships, a corporation is separate from its owners. As Investopedia describes, “Under the law, corporations possess many of the same rights and responsibilities as individuals. They can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes.”
Corporations are:
- Formed by filing with the state
- Owned by shareholders, who elect a board of directors, who, in turn, appoint officers to run the entity
- Shareholders have no liability for company actions or debts
- Corporations file IRS form 1120 (pays corporate tax)
- Can elect “S” Corporation status and qualify as a “pass through” entity
- A Corporation lives beyond the life of the shareholders
- Requires annual meetings and corporate resolutions
4. Limited Liability Company (LLC):
An LLC is a limited liability company. As the name suggests, this entity protects its owners from personal responsibility for its debts or liabilities.
LLCs are:
- Formed by filing with the state
- Owned by one or more “members”
- Can be managed by members or managers
- Managers do not have to be members
- No liability for members or managers
- Can be taxed in one of four ways
- Has continuity of life, depending on tax election
How to Protect Business Assets: 6 Factors to Consider When Setting Up a Business Entity
Now that you know the four major types of business entities, the next step is to choose the one that best suits your organization. If you’ve already started your business, you can still change entities if another type is more advantageous to you.
Here are six factors to consider when setting up your business entity:
1. Legal Issues
- The right entity will protect your business assets from liabilities
2. The Amount of Inconvenience
- You want your entity to be practical and protective without demanding extra stress from you.
3. Tax Issues
- The right tax structure can put more money in your pocket without having to commit any extra work.
4. Cost Factor
- Different entities come with different cost structures.
5. Ongoing Expenses and Legal Requirements
- You’ll want to have a good gauge on recurring costs, such as if you need to hire a CPA or accountant on a regular basis.
6. Raising Capital
- If you’re going to take on partners or raise capital in the form of debt, you may want to structure your entity differently.
This blog only scratches the surface of how to protect business assets. For more practical tips on how to secure your legacy by implementing the best legal and tax practices, register for our free WealthBuilders webinar on Thursday, June 22, at 4:00pm MT. (If you can’t make it at that time, register anyway– we’ll send you the recording!)
Register for the free webinar “Secure Your Legacy: How to Protect Business Assets” here.
