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.