There are many issues to consider. The first is the TYPE OF ENTITY. Sole Proprietorship is not recommended due to the exposure to personal liability
Partnership is not recommended due to the exposure to personal liability
A “C” corporation is not recommended because you could be subject to double taxation. The corporation pays income tax, and you pay income tax on your salary or distributions of profit.
A “S” corporation does not incur double taxation, but requires stricter formalities.
Limited Liability Company is the preferred method which I recommend to my clients.
The next big factor to consider is LIMITATION OF LIABILITY. The main way to protect your assets is to hold the title to your assets in the name of an entity rather than our individual name.For example, if you own investment or rental properties, you should consider putting each investment property into a limited liability company so that if a catastrophic incident occurs which kills someone, the only asset at risk if you are cast in judgment is the property which THAT entity owns.
If you alone or you and your spouse are the sole owners of the limited liability company, it is considered a pass-through entity for tax purposes. You would not need to file a separate tax return, you would just add one additional schedule to your personal tax return. This does not just pertain to real estate. Many of my clients put their money in the name of a limited liability company to protect it from seizure from a creditor or judgment holder.
CAVEAT: If you put your rental property, home, or car into a limited liability company, you have to change the insured on your insurance to that of your limited liability company.
CAVEAT #2: You must maintain your books and records like a business and not co-mingle your funds. Failure to do so could cause a court to “pierce the corporate veil” and expose you to personal liability.
Other factors to consider is based on the number of member in a limited liability company.
When an LLC is owned by more than 1 owner, an OPERATING AGREEMENT is highly recommended for a limited liability company or by-laws for a corporation.
If community asset, you may become a partner with your partners surviving spouse in the case of death or the ex-spouse in the case of divorce.
Consider a forced buy out in the case of death, divorce, and disability.
Figure out how your are going to determine the purchase price (FMV) as of date of death or divorce.
Determine terms of buy out: over 5, 10 or 20 years at what interest rate. Consider life insurance to fund buy out.
Disability is another consideration.
What happens if your partner becomes disabled and incapable of working in his normal capacity.
Consider forced buy out after a certain period of time, such as one (1) year.
Number of owners – % needed to make major business decisions.
Decide how to split profits or losses of the business.
Decide capital requirements of the business.Decide whether all the owners will be active in the business or merely investors.
Transferability of interests.
Do you want to become a partner with a stranger or your partner’s children?
Consider prohibiting transfer without unanimous consent.
Management and control.
Determine who will make decisions: Board of Directors or All Members?
Choice of calendar or fiscal years for tax purposes.
Fringe benefits and retirement plans
I have created and represented many businesses in Southeast Louisiana. Please call me for a free consultation at (504) 261-9157.