Utah Business Entity Formation

Why Incorporate Your Utah Business?

For many small entrepreneurs, there is no emotional or mental distinction between being personally sued or having your business named in a lawsuit.  You have put in the late nights, early mornings, and overtime on the weekends to make your business what it is.  Your fingerprints are found in every aspect of the day-to-day operation.  Typically, entrepreneurs feel so invested in their business that it becomes a part of their identity, and in some cases, they share each other’s namesake.

Often, if you find your business in legal trouble with a contractor, vendor, employee, or maybe even a lawsuit from a customer, it feels like a very personal attack.  However, legally speaking, this does not have to be the case.  By incorporating your business, you are able to separate your personal assets from your business assets.  And, while it may not feel like there is an emotional distinction between attacks on your business and attacks on you personally, there will be an important legal distinction that can protect you and your family.

Types of Utah Business Entities

There are several options to choose from when selecting a business entity such as incorporating as a sole proprietor, partnership, or a more traditional corporation.  For many businesses, forming a Limited Liability Company (“LLC”) may be the perfect solution.

In a Sole Proprietorship a single individual owns and operates a business, typically using their own assets and there is little distinction between the owner and the business.  An advantage of a Sole Proprietorship is that it is simple and requires not formalities.  One disadvantage is that the owner has unlimited personal liability for the business debts and obligations and all profits are subject to a self-employment tax.[1]

In a Partnership, two or more persons come together for the purpose of conducting business for profit.  There are many sub-types for Partnerships but the biggest advantage in Partnerships is the favorable tax treatment.  The major drawback to Partnership is that partners will be liable for each partner’s debt and obligations.[2]

A traditional corporation is an entity that is legally independent from its owners and is the most common form of doing business.  Liability protection is the principle advantage offered by corporations and it’s the main reason why they are the preferred business entity.  However, a corporation is subject to double taxation, meaning an owner must pay income tax and tax on corporate profits, is the central downside to this form of business entity.[3]

Compared to a corporation or a partnership, LLC’s are considered to be more “flexible” and still provide a business owner with liability protection.  What this means is owners have the personal protection like a corporation but they have more flexibility about how to run their business, how the entity is taxed, how it’s managed, and more.

Tax Benefits for Limited Liability Companies

One very important benefit of an LLC is how it is taxed.  An LLC is generally taxed as a partnership where the profits pass through directly to owners, thus avoiding double taxation.  A business owner can elect however to have their LLC taxed like an S Corp and owners can take periodic distributions.  The differences between these two taxing structures can mean thousands of tax dollars saved.

You also need a solid operating agreement. An operating agreement is essentially a document or set of documents that tells the owners how to operate the business after it has been born.  It specifies which members of the LLC have decision-making authority for business and how membership interests can be transferred.  A poorly drafted operating agreement can spell serious problems down the road.

Hiring An Attorney To Help You

According to the Utah Division of Corporations and Commercial Code, some 60% of all LLC’s in Utah are formed by business owners without the assistance of an attorney.  However, without the assistance of an attorney, many entrepreneurs and business owners may be surprised and unhappy with what they’ve created.  This is not because creating an LLC is rocket science. Rather, it’s because, like you, they are anxious to get their business moving and growing.  They often do not take the time to consider what may happen when a business partner decides to sell their interests or leave the business, or what which tax treatments are most favorable to their personal situations.

Our attorneys have the experience to walk you through these important decisions. Our goal is to help you protect your investment.

At Hepworth & Associates, we understand the needs of businesses.  We know that you want to be focused on running your business while knowing that you are protected in case something happens down the road.

Call today at (801) 872-2222. Let us earn your trust and be your lawyers for life.

 

Written by attorney Tyler S. Call.  Copyright © 2016 Hepworth, Murray, and Associates L.L.C.  All Rights Reserved.

 

 

[1] Johnson, Randy K., Choice of Business Entity, 8-Dec Utah B.J.7

[2] Id.

[3] Id.

Michael Hepworth

Michael Hepworth

Managing Attorney at Hepworth & Associates
Michael is the Managing Attorney of Hepworth & Associates, LLC.
Michael Hepworth

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