Nevada is a great place to do business for a number of reasons. Notably, Nevada has favorable tax laws and flexible corporate restrictions to encourage business men and women from across the world to form their businesses under our laws. Unfortunately, this flexibility leads to a wide range of options, which can be overwhelming for an entrepreneur trying to decide what type of business entity is right for them.
This article outlines the legal pros and cons of the most common types of business entities to help you determine the best fit for your business. It is important to note, however, that different business entities are taxed differently. For more information about how taxes might affect your decision, consult with your tax advisor.
The most common reason people form business entities is for liability protection. In general terms, some business entities shield the company's owners from personal liability from the company's debts. For example, if the company enters into a contract and the company breaks that contract, the owner is not necessarily personally liable for damages.
Not all entity types offer liability protection. Those that do are generally more expensive to form and operate and business owners are required to comply with various rules and requirements to maintain that liability protection. However, the benefits of doing so often vastly outweigh these costs and administrative burdens.
Sole proprietorship. The most basic form for a business is a sole proprietorship. A sole proprietorship requires no paperwork (other than necessary licensing), no filing fees, and no annual maintenance. It is very inexpensive but offers few benefits; most importantly, sole proprietorships offer no liability protection. Unless your business consists of selling homemade pottery on www.etsy.com, a sole proprietorship is probably not your best choice.
General partnership. A general partnership is essentially a multi-person sole proprietorship. It also requires no official paperwork and offers no liability protection. Like sole proprietorships, the primary benefit of a general partnership is that it is an inexpensive way to legally operate a business.
Be aware that general partnerships can be created unintentionally. If you have an "informal" business venture with another person, such as co-owning a rental property, a court of law might consider that to be a legal general partnership. This can lead to problematic and unintended legal consequences results. If you have an "informal" business relationship with another person, it is time to formalize your partnership into a legal entity and make sure you are protected.
Limited-liability company. A limited-liability company ("LLC") is probably the most common form of business entity used by small businesses in Nevada. An LLC offers its owners liability protection, but is more expensive to form and operate than a sole proprietorship or general partnership. The terms "LLC," "Ltd.," and "Co." often identify limited-liability companies.
LLCs offer the most flexible corporate structures, allowing the entity to adapt and change as your business grows. LLCs can be simple for owner-operated small businesses, complex for large businesses with multiple owners and officers, or anything in between. However, LLCs do not lend themselves to businesses involving numerous owners in varying capacities and levels of involvement.
The LLC's flexibility makes it a great option for companies owned and operated by a small group of people, regardless of the company's revenue. An LLC is a great fit for most businesses and tends to be an appropriate default choice unless you need the options presented by another business entity.
Corporation. Like LLCs, corporations offer their shareholders liability protection at the price of increased costs of formation and maintenance. The terms "Inc." and "Corp." generally refer to a corporation. "C Corp" and "S Corp" identify different tax designations for corporations; they do not identify different types of legal entities.
Corporations are slightly less flexible than LLCs but provide more options for complex ownership schemes. Corporations are ideal for business owners that intend to eventually take their business public or offer their employees stock options. Business owners seeking to bring in equity investors with any range of ownership interest and/or management control will also benefit from a corporation.
Professional entities. Professional corporations and professional limited-liability companies are available for certain professions that are prohibited from conducting business through traditional corporate forms. For example, lawyers, accountants, doctors, and architects are some of the professions who may not seek the liability protection offered by an LLC or a corporation.
Generally speaking, a "professional" may not use a liability shield to protect himself from liability for professional negligence. However, professionals may still seek liability protection for the non-professional debts of the company, such as breaching a lease. Professional corporations and professional limited-liability companies allows this balance. Aside from this restriction on the liability shield, professional corporations and professional limited-liability companies operate much like standard corporations and LLCs.
Other specialty entities. There are a number of other business entities available in Nevada for more limited purposes. Non-profit corporations offer excellent tax benefits, but are strictly regulated to prevent abuse. If your business qualifies as a non-profit, the tax benefits generally outweigh the added administrative burdens.
Limited partnerships and limited-liability partnerships offer more liability protection than general partnerships but less flexibility than LLCs or corporations. These business types can be enticing because they are generally cheaper to form than an LLC or corporation, but their ability to adapt and change is very limited.
Whatever business type you choose, put in the time and effort at the outset to ensure that your company is organized in a way that best fits your needs. Start-ups are already time consuming and expensive, but the organization of your business entity is a critical element that will follow your business throughout its life. Proper planning now will save you time and money down the road.
Austin Sweet is an attorney at Gunderson Law Firm in Reno. Contact him at 775-829-1222 or asweet@gundersonlaw.com.
