Jennifer Mahe: What type of business entity should I form?

The State of Nevada recognizes a variety of different types of entities which can be legally formed with the Nevada Secretary of State’s Office.

Some of the most commonly utilized types of entities are corporations, limited liability companies, also known as LLCs, and, though utilized to a lesser extent, limited partnerships. In deciding which entity type is appropriate for your business the specific facts of your situation must be considered, specifically who you desire to have authority to act on behalf of the entity and how you plan on governing the entity. Additionally, it’s important to consider the different tax consequences associated with entity selection which is something you should discuss with your accountant prior to formation of any entity.

Corporations are owned by individuals identified as shareholders. Depending upon the number of shares the entity is authorized to issue a corporation can have one shareholder or numerous shareholders. The shareholders elect a Board of Directors who are responsible for overseeing the overall governance of the entity. The Board of Directors thereafter elect officers who are responsible for the day to day operation of the entity. The officers regularly have authority to bind the entity. Moreover, as corporations have been legally recognized entities for an extended period of time they are subject to numerous laws regarding meetings, notices and agendas among other things. In order to ensure the entity provides liability protection to its shareholders it’s essential all of those legal requirements be met.

Limited liability companies are owned by individuals identified as members and are operated by individuals identified as either managers or member-managers. The distinction between being operated by a manager or a member-manager is whether an entity will be required to be operated by its membership, member managed, or whether it will be managed by someone elected by the membership, a manager. In determining whether the membership desires the LLC to be operated by a manager or a member-manager the membership should consider factors such as whether additional members will likely be added in the future and whether an individual can be identified who could act as a manager. Either the manager or the member-managers have the authority to bind the entity. Furthermore, LLCs haven’t been recognized as a type of legal entity for the same length of time as corporations. Accordingly, there are currently less laws associated with governing LLCs which sometimes makes it easier to ensure compliance with all applicable laws so as to obtain liability protection.

Limited partnerships are owned by at least one general partner and at least one limited partner. The general partner is the individual with the authority to bind the company and generally govern the entity. Nonetheless, the substantial risk associated with limited partnerships is the general partner is liable for all of the debts and obligations of the limited partnership. Accordingly, if this entity type is selected it’s advisable to form another entity to act as general partner to obtain the liability protection generally sought by individuals forming entities.

Thus, if you’re contemplating forming an entity you must consider a variety of factors to determine which type of entity to form. Among other things you should consider how many individuals are going to be involved with the entity, who you want to have the authority to act for the entity, how you intend to govern the entity and how concerned you’re about obtaining liability protection.

Jennifer Mahe has practiced law in the Northern Nevada area since 2005 focusing on general civil matters such as real estate, business, litigation and estate planning. She can be reached via the Mahe Law, Ltd. website, www.mahelaw.com, or at 775-461-0992. If you have a legal topic related to general civil law which you would like to see addressed in this column in the future, please send that topic to the Nevada Appeal.