Ask the Expert featuring Dimitri Panagopoulos, LL.M.
Q: I am considering starting a business. Should I organize as an LLC, a Corporation, or a Sole Proprietor?
A: Choosing which form of entity will vary depending on the kind of business, the potential liabilities to the owners for the businesses activities, the anticipated revenue, the number of owners and the way the business is funded.
For example, the LLC and the Corporation are entity forms that limit the owner’s personal risk for the business’ liabilities. In both, generally, the risk is limited to their capital contribution, or how much money they put into the company. That means if the company gets sued or incurs a liability, the creditor will generally not be able to look to the owners’ personal assets (such as a home) for recovery. Contrast this with doing business as a sole proprietor, where there is no legal distinction between the business and its owner when it comes to the business’ liabilities.
That’s why the starting point is to meet with legal counsel to review the tax implications and liability risks in your situation. Of equal importance, if there will be more than one owner, is that you have proper documentation in place that reflects the true agreement between or amongst the owners regarding the management of the business, the agreement as to sharing profits and losses, and an exit plan in the event one or more of the owners must withdraw from the business for one reason or another.
By sitting down with legal counsel before you jump into business, you will be able to discuss these various concerns, and plan and protect your business to optimize your chances for success. As Benjamin Franklin very precisely articulated, “An ounce of prevention is worth a pound of cure”.
The above is intended as general legal information and opinion of Dimitri Panagopoulos, a licensed attorney admitted to practice in all California State Courts, the U.S. Tax Court, and the United States District Courts, Southern and Central Districts of California; and is provided for academic use. Anyone with a legal matter is encouraged to discuss their specific concerns with an attorney of their choice. For more information about Dimitri and his firm, please visit www.pan-em.com, or email Dimitri at firstname.lastname@example.org.