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Business Formation

If one is forming a business, there are many important and legally complex issues that must be considered. The attorneys at Abramson and Rand can help you navigate these issues and set up the business that fits your particular needs. One of the most common issues in forming a business is what type of entity is appropriate for tax and liability purposes. This decision is often critical to the success of a business venture.  Below is a summary of the various different types of business entities, how they are formed, and the tax implications.

Type of Organization Owners Formation Taxes
Sole Proprietorship 1 Single Owner No filing required Single Taxation of the owner's personal income
General Partnership 2 or more No formal filing requirement

Single Taxation of partner's income

Pass Through

Limited Partnership 2 or more partners with at least 1 General partner (GP) AND 1 Limited partner (LP) Must file a Certificate of Limited Partnership pursuant to Md. § 10-210.

Single Taxation of partner's personal income

Pass Through

Corporation At least 1 Shareholder Must file Articles of Incorporation pursuant to Md. § 2-104.

C Corp (publicly traded): Double Taxation: corp’s income and on the distribution

S Corp (closely held limited to 100 shareholders): Single Taxation on distribution

Limited Liability Corporation (LLC) 1 Person called a member Must file Articles of Organizations Single Taxation on the owner's personal income
Limited Liability Partnership (LLP) 2 or more partners Must file a Certificate of Limited Liability Single level Taxation at partner's personal income

Limited Liability

Limited Partnership (LLLP)

2 or more partners Must file a Certificate of Limited Liability  Single level Taxation at partner's personal income

 

It would exhaustive in this overview to outline the advantages and disadvantages of each business entity, but certainly each one has tax and protection benefits. Too often people make rash decisions about business formation and, unfortunately, those decisions can lead to dramatic and harmful consequences. For that reason, a client should not come into our office with a pre-conceived notion of what business entity is appropriate. Instead, it is important to allow the attorney to assist you in evaluating the nature of your business and what business entity is the best fit.

In order to determine which entity is best under your particular circumstance, the following questions must be considered:

  1. What happens upon death of one of the parties?
  2. What if one wants to buy out the other’s interest?
  3. What if the venture is not profitable and one wants to leave?
  4. How would a lawsuit against one party affect the business entity?
  5. How does one allow others to buy into the venture?
  6. What if the entity committed some negligence, how would this affect the individuals?
  7. How are the profits distributed?
  8. Should there be a manager who is paid to manage the entity?
  9. How are decisions made as to distributions of capital or profit?
  10. What if one party has less money to contribute than the other(s)?
  11. What is the arrangement if one party has the idea or talent and the other(s) has the capital?
  12. Can a party loan money from or to the entity?
  13. Would one party be responsible for the actions and decisions of the other?
  14. How does the entity terminate; what is its life
  15. Who shall decide what other business areas the entity should be involved in?
  16. What is the remedy if one is producing more product or capital than the other?
  17. Who has the power to write the checks, and are limits on this power?
  18. Can one make purchases without the consent of the other?
  19. What if one files for bankruptcy?
  20. Are the profits of the entity fully taxable?
  21. What depreciation schedule should be applied to the assets of the entity?
  22. Who chooses the accountant or the attorney for the entity?

 

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