Starting a New Business - 8 Options to Consider
NOTHING IN THIS ARTICLE SHOULD BE CONSTRUED AS LEGAL ADVICE AND THE READER SHOULD NOT RELY ON THE STATEMENTS CONTAINED HEREIN.
If you are looking to start a new business or convert your existing company into the optimal business structure, then you have several options to consider. The best option for your new organization will depend on a variety of factors. The following is an overview of the more common “for-profit” business entity options in Montana.
Sole Proprietorship: A sole proprietorship is the simplest and cheapest business form; in essence, the owner is the business. Registration of a sole proprietorship with Montana’s Secretary of State is only required if you are planning on doing business under a name that is different than your actual name. In that instance, you would only need to register your business name as an “Assumed Business Name.” Prior to conducting business under your sole proprietorship, you will need to receive all necessary state and local business licenses unless an exception applies. One disadvantage of this option is the owner is personally responsible for all debts and liabilities of the business.
General Partnership: A general partnership is an association of two or more people (or entities) acting as co-owners of a for-profit business. Partnerships are inexpensive to create and operate, and any income or losses pass through and are reported on the individual partners’ tax returns. One disadvantage of this option is partners share personal liability for all of the debt and liabilities of the partnership.
Limited Partnership: A limited partnership consists of at least one general partner, and one or more limited partners. The general partner manages the business and is personally responsible and liable for all claims against the partnership, including all debts and liabilities. A limited partner has limited liability but cannot participate in the management of the partnership. A limited partnership is less common than general partnerships.
Limited Liability Partnership: A limited liability partnership operates like a general partnership, but the individual partners are generally not liable for any debts or liabilities of the partnership. The partners may still be liable for the partner’s own negligence, wrongful acts, or misconduct or that of any person under the partner’s direct supervision and control. Limited liability partnerships are commonly used for professional partnerships like a group of doctors or accountants.
Limited Liability Limited Partnership: A limited liability limited partnership operates like a limited partnership, but the general partners have some debt and liability protection. Like in limited partnerships, the limited partners typically cannot participate in the management of the partnership. This type of entity is not available in all states, but it is recognized in Montana. One potential disadvantage is the fact that not all states recognize this entity, especially if your new business is planning on doing business outside of Montana.
Limited Liability Company: A limited liability company (LLC) is a hybrid business entity that takes attributes of a partnership and a corporation to create a business entity that contains the flexibility of a partnership and the personal debt and liability protection of a corporation. LLC’s offer options and flexibility with the number of owners (members), the management of the company, and the way the company is treated for tax purposes.
Professional Limited Liability Company: A professional limited liability company (PLLC) is designed for and limited to licensed professionals, such as, doctors, lawyers, architects, engineers, and accountants. There are important limitations on the members, managers, and the types of services rendered by PLLC’s that should be discussed with trained professionals prior to considering this business entity option.
Corporation: A corporation is a group of people or a company authorized to act as a single entity. A corporation exists apart from its owners (shareholders), and as a separate entity the corporation has its own rights, privileges, and liabilities which are set apart from the individuals who formed it. A corporation is the most formal business entity. It will need to create and file articles of incorporation, as well as have a document which sets forth the corporate governance called the bylaws. Corporations are also required to have annual meetings of its board of directors and its shareholders. Unless it elects to be taxed as an “S Corporation”, in general, corporations pay taxes on its profits and its shareholders pay taxes on any dividends received. There are several variations of corporations allowed in Montana, including S-Corporations, statutory close corporations, and professional corporations.
The optimal business entity option for your business will depend on a myriad of factors which should be discussed with an attorney prior to forming your new business or converting your existing business into a different structure.