LEGAL BRIEFING - Liability the big question in forming business entity

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Dear John,

My wife and I have a business making paper airplanes out of junk-mail. We have been growing in sales for the past several years due to a positive reputation on the Internet. What started as a hobby has now grown into a large portion of our household income. We think it is time to form a business entity. Which one should we choose?

Sincerely,

Asking Al

Dear Al,

Choosing between a sole proprietor, partnership, limited partnership, limited liability corporation (LLC) or corporation requires a lot of research and comparison of your vision for your company to the options available. They each have advantages and disadvantages. I suggest you speak with an attorney and accountant to decide which type is right for you.

The main distinction between the choices is liability. Sole proprietors, partnership and limited-partnerships each convey liability for business debt on the owners. Whereas, LLCs and corporations do not. This means that owners who have personal assets they wish to keep safe from creditors should form either and LLC or a corporation.

Choosing between an LLC and a corporation is mostly a tax-based decision. However, a smaller "mom and pop" business may also want to consider the differences in administrative responsibilities between the two entities. After all, you want to make paper airplanes, not fill out forms.

This article is unable to delve into the taxation differences of each entity sufficiently to help you decide. However, the main difference between the two entities is the pass-through taxation of the LLC and the double taxation of the corporation with different deduction structure.

While I know that I did not directly answer your question, I hope you have some questions you can take to your professional advisors to help them help you.

Good luck,

John

John Hartzell is a practicing Walla Walla attorney. No attorney-client relationship is established via this column, which is for educational purposes only. Information is given only to illustrate basic legal concepts. Have question? Ask John at askjohn@wwub.com.

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