Your Entity Menu : Part 1

Own Your Own Corporation : Why the Rich Own Their Own Companies and Everyone Else Works for Them
by Garrett Sutton, Esq.

Own Your Own Corporation reveals how private citizens can take advantage of incorporating themselves and their business to save thousands of dollars in taxes and protect themselves against financial disaster.

Chapter 1

• C corporation
• S corporation
• Limited Liability Company (LLC)
• Limited Partnership (LP)
• General Partnership
• Sole Proprietorship

As legal business systems and traditions have developed over the last five hundred years, several structures for running a business have evolved. Each structure (or entity) has its own advantages and drawbacks, which we will explore.

As a frame of reference for making your selection, it is important for you to clarify your strategy in this planning. The purpose of this chapter is foryou to clearly understand and choose the best entity for your unique and specific purpose. To that end, the following checklist should be considered:

1. Protection of family assets and investments
2. Management control
3. Avoiding family disputes
4. Flexibility of decision making
5. Succession of children and other family members to management
6. The nature of the business to be operated
7. The nature of the asset to be held
8. The number of owners involved
9. Estate planning and gifting of assets
10. Who may legally obligate the business
11. Effect upon an owner's death or departure
12. The need for start-up funding
13. Taxation
14. Privacy of ownership
15. Consolidation of assets and investments

These and other issues will become apparent as we review your choices. And please note, your decision does not have to be made alone. It is recommended that these issues be discussed with your attorney, accountant, or other professional advisor. An individual well versed in these areas will provide excellent insight into which entity is right for you. It is important to know that in entity selection one size does not fit all.

If your attorney or accountant suggests only one entity, a general partnership for example, for each and every business venture you have him or her review,you will want to question why they believe one entity fits all situations. Or you may want to seek out a new professional advisor.

We will discuss which entities work well in various business and asset-holding scenarios. But before doing so, we must point out which entities do not work well in any situation. For as important as knowing which entity to use for running your business, protecting your assets, and limiting your liability is knowing which entity NOT to use.

Bad Entities

• Sole proprietorships
• General partnerships

In my legal practice I represent various businesses, from small and basic to large and complicated. I enjoy helping entrepreneurs and business owners make money, provide for their families and employees, and secure a stable future.

I cannot do my job if a client insists on using a bad entity. Sole proprietorships and general partnerships provide no asset protection. One lawsuit against your business, and your house, savings, and personal assets can all be lost. Our first case is illustrative.

Case No. 1-Johnny

Johnny was a plumber. He had been at it for five years and was starting to succeed. His customers were satisfied with his work and the word of mouth for Johnny's Ace Plumbing was good.

While Johnny was a good plumber, he felt intimidated by legal matters. Lawyers and accountants were supposed to be smart, so the work they did must be difficult. When Johnny was a young boy his father had been unfairly treated by a lawyer. He remembered it to this day, and wanted nothing to do with them.

So instead of consulting with a professional on how best to conduct his business, Johnny let his part-time bookkeeper select an entity off the menu. The results were disastrous.

Johnny's part-time bookkeeper knew only that forming a corporation required filing special documents with the state but did not know how to file them. He knew that a corporation needed to file a separate tax return but was not sure of the ins and outs of preparing one. As so he suggested Johnny use a sole proprietorship because he knew how to handle one and always suggested one for his clients. One size fits all.

The problem was that a sole proprietorship provides absolutely no asset protection. By operating as a sole proprietorship Johnny has unlimited liability for the debts, claims, and obligations of the business. This unlimited liability meant that his house and savings and personal assets were exposed to the claims of others.

Of course, as in all horror stories, a demon entered Johnny's business. He had hired Damien as an employee to assist with his growing workload. Damien seemed like a decent guy and appeared to know the plumbing business. Johnny did not bother to do a background check on Damien. Johnny was new to the business world and not aware of the need to do so.

After one week on the job, Damien assaulted one of Johnny's customers while they were alone in her house. Without going into the sordid details, this woman was so severely traumatized by what Damien did to her in her own home that she and her family had to move away.

Copyright © 2001 by Garrett Sutton, Esq.

About the Author

Garrett Sutton, Esq. has over twenty five years experience assisting and advising entrepreneurs, families and business in selecting the appropriate corporate structures to limit their liability, protect their assets, build their credit and advance their personal and financial goals through real estate investments and other means of wealth creation. Sutton is the owner of Sutton Law Center, Sutton Law which has offices in Reno, Nevada, Jackson Hole, Wyoming and Sacramento California.