Hardwood Floors June/July 2018

BUSINESS BEST PRACTICES LEGAL

By Kailey Grant

CHOICE OF BUSINESS ENTITY An Overv i ew of Non -Tax Cons i dera t i ons

Limited Liability Company (LLC) A Limited Liability Company (LLC) is one of the most common entities utilized for small businesses. It is a form of business entity that permits the pass-through federal tax treatment of a partnership and the liability protections of a corporation. The liability of the owners of the LLC, typically called the members, is limited to the amount of capital contributed to the LLC, which shields them from personal liability in most instances. An LLC can be made up of one or more members, but two or more members are required if the LLC wants to be taxed as a partnership. One of the greatest advantages of the LLC is its flexibility. State LLC statutes are typically made up of default provisions that apply in the absence of a limited liability company agreement or operating agreement and a few mandatory provisions that cannot be altered. While the adoption of a written operating agreement is not required, it is advisable and provides ultimate flexibility in the management structure, voting rights, allocation of profits and losses, transfer of membership interests, distributions, and liquidation and dissolution of the LLC, among other things. The governance of an LLC can be as simple or as complex as you make it. Due to the relatively recent development of the LLC, statutory and case law is less developed than corporation and partnership law. While this provides more freedom and flexibility, it also provides less certainty. Additionally, some states require LLCs to file annual reports and pay a fee to remain in good standing. Finally, while the flexibility of an LLC’s operating agreement is an advantage, it can also be a disadvantage depending on the circumstances. A poorly drafted operating agreement can lead to ambiguities, inconsistencies, and disputes throughout the life of the LLC.

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Regardless of the nature of your business or what sector of the hardwood flooring industry you work within, the choice of type of entity is an important decision with many factors to consider. The following is a summary of those considerations. Sole Proprietorship A sole proprietorship, which is not a legal entity but simply an unincorporated business owned by one individual, may seem like the easiest, fastest, and cheapest way to start a business. However, if you choose to operate as a sole proprietor, the assets and liabilities of the business are not separate from your personal assets and liabilities. This means you can be held personally liable for the liabilities of the business and your potential liability is limitless. Other common business structures that provide greater protection from personal liability include limited liability companies, partnerships, and corporations and there are advantages and disadvantages to each. This article provides a broad overview of these advantages and disadvantages, but does not discuss the tax implications. Please note the tax implications vary significantly between each entity and business organization and laws vary state by state. You should consult both a legal and tax adviser before the formation of your business.

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