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.
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. The advantage is simplicity and minimal formalities. The disadvantage is that the owner has unlimited personal liability for the business debts and obligations, and all profits are subject to self-employment tax.
Partnership
Two or more persons come together for the purpose of conducting business for profit. There are many sub-types, but the biggest advantage is favorable tax treatment. The major drawback is that partners will be liable for each partner’s debt and obligations.
Corporation
An entity that is legally independent from its owners and is the most common form of doing business. Liability protection is the principal advantage. However, a corporation is subject to double taxation — meaning an owner must pay income tax and tax on corporate profits — which is the central downside to this form of business entity.
Limited Liability Company (LLC)
Compared to a corporation or a partnership, LLCs are considered more “flexible” and still provide a business owner with liability protection. Owners have the personal protection of a corporation but 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 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 — a document that tells the owners how to operate the business after it has been formed. It specifies which members of the LLC have decision-making authority 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 LLCs in Utah are formed by business owners without the assistance of an attorney. However, without legal guidance, many entrepreneurs may be surprised and unhappy with what they’ve created. 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 which tax treatments are most favorable to their personal situations.
At Hepworth Legal, 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. Contact us today to get started.
