Would you like to start your own business, but do not know where to start? There are many steps in the process of starting a business that have been covered extensively elsewhere in the blogosphere. From a foundational and legal perspective, choosing the right entity for your new business can have varying impacts that could affect how much you and/or your company will pay in taxes and your personal liability for company actions. Choosing an entity is not a one size fits all occasion. You should always consult with your attorney and accountant to decide what entity type best suits your situation both now and in the future.
As a short premier on entities in Kentucky, this article will outline some of the most popular types of entities organized in Kentucky. This article will address corporations, limited liability companies, partnerships, and sole proprietorships.
A corporation can best be described through example. True corporations are the large entities we all know and love, such as Coke, Proctor & Gamble, and Pepsico. Corporations are rigid in their structure and typically do not offer much flexibility. Corporations typically have “Inc.” following the name of the company. Shareholders of the corporation are not liable for claims against the corporation. The power to control and manage the corporation are vested in the directors of the corporation, who are elected by the shareholders. Directors then employ officers (e.g. CEO) to handle the daily affairs of the corporation. Corporations can be taxed as either a C corporation or an S corporation, which determines how income is taxed at both the corporation level and again when disbursed to shareholders of the corporation.
2. Limited Liability Company
The limited liability company is one of the most popular entities organized in Kentucky. The limited liability company is a blend of the best attributes of the corporation and the partnership. Limited liability companies typically have some variation of “LLC” following the name of the company. Limited liability companies provide limited liability of a shareholder and similar to a partnership, there is only one level of taxation (known as pass through taxation). Limited liability companies are treated liked partnerships, so the shareholders experience great flexibility with regards to company structure and formalities required. As the limited liability company has grown popular in recent years, state legislatures have provided varying forms of the entity to provide for specific scenarios. For example, entities such as Limited Liability Partnership and Limited Liability Limited Partnerships have become choices for new companies being created.
General partnerships consist of two or more people who engage in business activities as “partners”. The general partners have unlimited personal liability and are responsible for the actions of the partnerships and their partners. Partnerships are taxed on the individual partner level and do not pay taxes as a stand alone entity. Partnerships provide great flexibility depending on your needs, but do not provide for much in the needs of limiting your individual liability.
4. Sole Proprietorship
A sole proprietorship is exactly what it sounds like, a business that is ran by one person who assumes full personal liability. Sole proprietorships require minimal effort to create and require even fewer formalities than any of the previously mentioned entity types. Sole Proprietorships are taxed at the individual level and provide no protection from liability.
Determining the right entity type can take time and you really should perform the required due diligence to select the best fitting entity type for you and your business. As mentioned previously, your decision now can have great impacts on your tax liability and personal liability down the road.
It is important to note that this is not by any means and exhaustive list of entities that can be formed in Kentucky. Within each entity described above, there also exist varying degrees of tax treatment and structuring. It is important to understand that nothing in this article should be construed as legal advice being given on behalf of Fort Law Group, PLLC or its authors. This is simply for informational purposes only. If you wish to discuss what entity type is right for you and your company, please give us a call at (502) 509-3678 to set up a consultation. The attorneys at Fort Law Group, PLLC have experience in start-up companies and the entity registration process. We would love to help you and your new or contemplated business at any point in the process. Let us know how we can help and make the process easier for you. We look forward to your calls.