When starting a new company, selecting the right business entity to form is a very important first step.
Historically, incorporating your business and electing S- Corporation status for taxation purposes was one of the most common approaches taken when forming a new company. This was especially true with small, family-owned business (often referred to as “closely held corporations”). This approach was perfect for limiting the owners’ personal liability and for allowing the business entity to act as a pass-thru entity for purposes of taxation to avoid double taxation.
Despite these benefits, there are several corporate formalities that, by law, must be followed in managing the affairs of the company and day-to-day operations. These formalities can be burdensome and oftentimes end up being ignored when business is good, and the leaders of the company are pre-occupied. Ignoring these formalities can have rather severe and adverse effects on the business itself and the individual owners.
Until the early 90’s, the other structure that a business owner could select was a partnership. Although a partnership allows an individual to avoid double taxation and the burdensome corporate formalities, at least one partner would oftentimes be personally liable for the liabilities and debts of the partnership. This became a nonstarter for many individuals who were looking to start a new company.
In 1993, the landscape changed completely when the State of Indiana passed the Indiana Business Flexibility Act. This law did exactly what the title says, it allowed for more flexibility within the business structure. What this law created was a new business entity called the Limited Liability Company (“LLC”).
An LLC has been described the perfect hybrid mixing of the best qualities of both entities, the limited liability protections of the corporate structure with the ease of managing the operation of a partnership. Small business owners could now maintain their limited liability protections while avoiding the headache of having shareholder meetings to elect the Board of Directors, Board of Director meetings to elect the Officers and Officers making reports back to Shareholders when all three factions consist of the same people. In addition, flexibility in the options for tax elections is also provided within the Act.
An LLC can select to be taxed as a C-Corp (double taxation), an S-Corp (pass-thru entity), a Partnership (pass-thru entity), or a disregarded entity (for Single-Member LLC only). Which selection works best for the owner is a fact sensitive analysis that will require the input from the owner’s accountant.
The Act also allows for more flexibility in the day-to-day operations of an LLC. The LLC can be managed by the owners themselves, or a manager who is selected by the owners and has no ownership in the company itself. Delegating day-to-day responsibilities, replacing the manager, or converting from a member-managed LLC to a manger-managed LLC, can be done with relative ease in comparison to the corporate structure involving shareholders, directors, and officers in these decisions. For these reasons the LLC has become the predominant entity selected by individuals looking to start a new company in Indiana.
A more complex discussion may need to occur before the proper selection can be made. If you would like to discuss which entity is right for you, or if you would like our help in forming the entity you have selected, please do not hesitate to reach out to our firm to schedule a consultation with our experienced Indiana business lawyers.
Additionally, if you are interested in converting your company from one entity to another, selling your current business, acquiring an already established business or discussing succession planning please do not hesitate to contact Mattox & Wilson. We would appreciate the opportunity to help you plan for your next venture.