Selecting Your Business Entity

Selecting Your Business Entity

Factors to consider when deciding what types of business entity you should form.


There are 4 types of entities available in Nebraska.

  1. Sole Proprietorship
  2. Corporation
  3. Limited Liability Company
  4. Partnership

Under the Corporation category, there are 7 sub-types of corporation.

  1. Domestic Corporation
  2. Domestic Non-Profit Corporation
  3. Domestic Professional Corporation
  4. Foreign Corporation
  5. Foreign Non-Profit Corporation
  6. Foreign Professional Corporation
  7. Nebraska Benefit Corporation

Under the Limited Liability Company category, there are 4 sub-types of LLC.

  1. Domestic Limited Liability Company
  2. Domestic Limited Liability Company Professional Service
  3. Foreign Limited Liability Company
  4. Foreign Limited Liability Company Professional Service

Under the Partnership category, there are 2 sub-types of partnership.

  1. General Partnership
  2. Limited Partnership

In determining which type of business you should form, several factors should be considered. They include tax treatments, liability protection, stock issuance, prospect of going public, management style, purpose of business, and available funding.

The most common types of businesses are corporations and limited liability companies. Below is a general comparison of the two.

  1. Personal Liability Protection

Personal liability protection is the primary reason to form a legal business entity. Both limited liability companies and corporations provide some degree of separation of owner liability and the business’s liabilities, shielding the owners/investors from the creditors of the business. This means only the money actually invested into the business stands to be lost, personal money and assets of the owners or investors are protected. However, there are always exceptions—notably, personal guarantees on debts, sometimes taxes, piercing of the corporate veil, personal negligence and fraud.  Obtaining business insurance is another important method of liability protection. Both LLCs and corporations also have formalities which need to be respected in order to maintain the liability protection desired.  Not maintaining these formalities can allow courts to disregard the legal identity of the entity and pursue the owner(s) personally to satisfy debts, this is known as “piercing the veil.” LLCs generally have fewer formalities than corporations. As an owner, you should not use the business funds or assets as your own, i.e. ensure you are writing checks from the business account only for business purposes. Also, make sure the business is properly capitalized, as court may question a business that does not have enough funds to pay foreseeable expenses. Corporations have additional formalities to maintain such as naming directors and officers, holding meetings, giving notices to shareholders, and keeping certain records (although both entities have biennial reporting requirements). 

  1. Taxation 

LLCs and Corporations receive different tax treatments. C-corporations have “double taxation” while LLCs can elect one of several treatments but generally have “pass-through” taxation. A single owner LLC is by default taxed as a sole proprietorship, meaning the IRS disregards the business entity entirely and all the income and losses are denoted on the owner’s taxes. When an LLC has multiple equity owners, a form, K-1 schedule, must be filed describing the equity division, but income and losses are still “passed-through” or attributed to the owners who then must pay tax on their proportional share. LLC can elect to be taxed as a C Corporation or an S Corporation by filing Form 8832. LLCs can make the election at any time of their existence. However, once election is done, an LLC has to wait 60 months before electing a different tax classification. C-corporations are treated the same regardless of number of owners: income is taxed independently within the business and then any distributions to owners are taxable to the owners, thus a “double tax." 

  1. Management

LLCs offer the flexibility to organize the management in various ways but do not require any particular structure. Corporations have a defined ownership and management structure among shareholders, directors, officers but can also be flexible in who makes decisions and how. An LLC could be set up with little formal management structure when a single person owns the entire business. However, it does become more complicated if additional owners want to join. In a corporation, a single person can hold the positions of a shareholder, a director, and an officer and effectively run the company by himself, but there are the formalities that need to be respected at each level. In a situation with multiple shareholders, you may maintain control at each level; however, common stock owners generally have some voting rights corresponding to the quantity of shares owned (preferred shares typically do not carry voting rights). In sum, both entity situations allow you to structure the management and ownership interests to provide you control of the business decision making.

 

  1. Fundraising / Financing

The interests and desires of investors are appropriate considerations during the entity selection process. Founders may desire some control structuring the management, perhaps a veto or consulting power regarding major business decisions. Those preferences may be satisfied in either entity. Nevertheless, investors often prefer corporations because the equity rights, structure, tax treatment and laws are more standard and familiar.