Choosing the proper legal form is one of the single most important decisions in the infancy of an Entrepreneur’s startup endeavors. It will guide how decisions regarding the operation of business will be made, the exposure to liability of select members, and rules regarding taxation. It is fair to assume that most, if not all, entrepreneurs have a sound foundation in the principles of business. A large stumbling block for many of these same entrepreneurs is wading through the complexities of choosing the correct legal entity for their Georgia business.
Choosing the correct business formation depends on a variety of factors that are case specific to each small business owner’s individual situation and objectives. Each entity carries with it its own pro’s and con’s that must be carefully weighed against the would be business owner’s needs, with an eye for optimizing success of the organization. What follows are the most common entities and some information regarding each of them.
Sole Proprietorship
A Sole Proprietorship is the easiest type of business to form. The business usually operates in the name of the owner. There is no formal filing with the state to create this legal entity, and a business and or occupational license is all that is required to begin. While this is the easiest business form to create, it also carries one of the largest drawbacks. Personal and business activities are not distinguished in a Sole Proprietorship, meaning that all income from the business passes through to the owner or sole proprietor. There is also no shield from liability, meaning that the business owner is personally liable to all debts of the business.
Partnership
Similar to a Sole Proprietorship, a partnership can be very simple to form, and is merely an agreement regarding a business relationship between two or more people who join to carry on a trade or business. Where a Sole Proprietorship has a single owner and decision holder, a Partnership has at a minimum two members who are responsible for the carrying on of the business. These partners contribute capital, labor, or skill to the organization and in return share in the profits and losses. Generally speaking, a Partnership carries with it unlimited liability and pass through taxation, although some exceptions to this exist. While a formal, written partnership agreement is not necessary to create a partnership in Georgia, it is strongly recommended.
C – Corporation
A C Corporation differs from a Sole Proprietorship or Partnership in that it is a unique legal entity that exists distinctly and separately from its owners. It requires more steps to be properly formed, and must be registered with the Secretary of State in Georgia. Ownership of a corporation is governed by shareholders of the entity who appoint a board of directors to oversee corporate decisions and policies. This board of directors can elect officers of the company to manage day to day affairs. In a start-up or small business, these officers are also typically the shareholders. With the drawback of the C Corp. being the complexity of the organization, the benefit of this entity is the legal separation of assets and liability from the owner. Income from the Corporation is taxed to the corporation then sent to the individual in the form of a distribution. This is referred to as “double taxation” however the benefit of this formation is that the liability of the corporation does not extend to the personal assets of the owner.
S – Corporation
An S – Corporation is comprised of the same formation that exists for a C – Corp. above save for one difference. S – Corp. Status is an election made to have the corporation’s income and expenses taxed to the owner’s via “pass through” discussed above. It offers the same liability safe havens as a general corporation, but avoids the “double taxation” that exists within a C – Corp. There are limitations as to who may qualify for organization under an S – Corp.
Limited Liability Company
A Limited Liability Company; or LLC is a hybrid entity that combines the limited liability characteristics of a corporation with the beneficial tax structure of a partnership. While requiring more formality and steps to create than a Sole Proprietorship or Partnership, an LLC enjoys the same flexibility that these entities share with regards to pass through taxation and ease of ownership decision making. LLC’s also enjoy the benefits of corporate formation with regards to limitation of liability, while avoiding the rigidity of double taxation, required shareholder meetings, complex decision making, or issuance and management of stock. Limited Liability Companies are popular among small business owners in the state of Georgia.
An experienced Georgia business attorney can help evaluate, start, or manage your Georgia small business or startup. Contact Thrift McLemore by email at info@thriftlegal.com or by phone at 678-671-4031 to discuss how we can assist you in creating your Georgia business today.
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