What Type of Entity Should I Create For My New Business?

One of the first and most important decisions any business owner makes is how to structure his or her business.  This will depend largely on the type of business, how many owners are involved, and tax considerations.  It is important to involve a tax professional early on to assist with this decision.

In Montana, there are four main types of entities: a sole proprietorship, a partnership, a limited liability company (LLC), and a corporation.  Some of these entities are further broken into sub-categories.  For example, in Montana, if you intend to form a partnership, you can form a: general partnership, a limited partnership, a limited liability partnership or a limited liability limited partnership.  The differences between these entities are outlined on the Secretary of State’s website here.  If you intend to form a corporation, there are five different options in Montana: S corporation, Statutory Close corporation, Public Benefit corporation, Professional corporation, or a Nonprofit corporation.

If you intend to run your business on your own and the nature of your business is such that you are unlikely to need any employees and your liability exposure is relatively low, a sole proprietorship may be a good option.  Notably, if you operate a business without registering, it will automatically be classified as a sole proprietorship by operation of law.  However, this structure will not separate your business assets and liabilities from personal assets and liabilities, so a single-member LLC as opposed to a sole proprietorship, is often advisable to reduce risk exposure.

If your business will have more than one owner, forming an LLC, LP, or LLP are all options.  An LLC will protect the personal assets of all owners (called members).  An LLC also provides the option to be taxed as an S corporation or a partnership.  An LP provides for one general partner who has unlimited liability while the other partners have limited liability and limited control over the company.  An LLP is similar to an LP but with limited liability for all partners.  Profits pass through to personal tax returns in these structures.

Corporations, on the other hand, are legal entities that are entirely separate from their owners.  Corporations can make a profit, be taxed, and can be held legally liable.  Corporations usually offer the strongest protection to their owners and shareholders, however with that increased protection comes increased costs in the form of additional taxes.

The entity you choose to form is an important consideration that should involve a team made up of a legal professional and a tax professional to ensure the greatest legal protections and mitigation of tax consequences.  If you are thinking of starting a business or restructuring your existing business, Jones Law Firm would be happy to be part of your team.

Do I Need an Employment Contract?

If you currently have employees, or if you are thinking of adding employees to your growing business, you have probably wondered whether you need a formal employment contract.  There are many benefits to having a written employment contract.  However, a formal written contract is not always necessary.  Written employment contracts make the relationship between employer and employee clear by ensuring each party understands its obligations to the other, but they can also result in added liabilities for the employer.

The first questions to consider are how long you anticipate the employment relationship will be and how much discretion you want to separate employees from their employment with you.  Generally, employment relationships in Montana are governed by the Wrongful Discharge from Employment Act (“WDEA”), which allows an employer to terminate an employee only in certain circumstances.  However, written contracts for a specified period of time are usually exempt from the requirements of the WDEA.  Thus, if you know an employee is only going to be employed by you for a finite period of time, a written employment agreement governing the terms of that relationship makes sense.

Other valid reasons for written employment agreements include defining the employment relationship when the employee will have a great deal of discretion and decision-making authority, such as a management position.  Although the WDEA may still apply to these written agreements (if they are not for a finite period of time), clarifying the authority, duties, and expectations for your employees makes good sense.  Additionally, if you intend to have an employee agree to other terms as a condition of his or her employment, it is a good idea to have an employment contract.  For example, if you have an employee handbook and a Non-Disclosure Agreement that you want the new employee to abide by, even if only for a short time, then it makes sense to append those documents to an employment contract that provides clarity for both employer and employee.  If you are hoping this employee will stay with your company for a long time, whether an employment agreement is necessary or advisable depends on the specific needs of your business.

A clear and thorough employment contract assists employers in defining the employment relationship because it takes out the guesswork for the employer, the employee, and any third party who may be helping resolve a dispute between them.  If you are not sure whether you need an employment contract for your growing business, or if you would like your current contracts reviewed and updated, Jones Law Firm can assist you in adding clarity and peace of mind to your employment agreements.

Jones Law Firm Blog: Business Owners’ Series

The Jones Law Firm Blog seeks to provide short, easy to digest information on timely legal topics.  For 2021, Jones Law Firm’s blog articles will primarily focus on the needs of business owners.  Check back here regularly for informative articles in Jones Law Firm’s “Business Owners’ Series.”  We are excited to provide our clients and potential clients with this additional service!