Selecting the Business Entity that’s Right for You

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Choosing the Right Business Entity for Your Goals

When you start a business, one of the first and most important decisions you’ll make is choosing a legal structure. The right business entity can provide crucial liability protection, separating your personal assets from your business debts. The wrong choice, or a failure to operate your chosen entity correctly, can leave you dangerously exposed.

Let’s explore the most common options available in North Carolina.

The Corporation: C-Corp vs. S-Corp

A corporation is a traditional business structure that is legally separate from its owners. The primary advantage is limited liability protection.

  • C-Corporation: This is the standard corporate structure. It is taxed separately from its owners, which can be a disadvantage for start-ups, as any business losses cannot be passed through to the owners’ personal tax returns.
  • S-Corporation: An S-Corp starts as a traditional corporation, but the owners elect to be treated like a partnership for tax purposes. This allows profits and losses to “flow through” to the owners’ personal tax returns. This can be advantageous for new businesses that expect to have losses in the early years.

The Limited Liability Company (LLC)

The LLC is often the most flexible and popular choice for small businesses. Like a corporation, it provides limited liability protection, but with fewer formal requirements.

An LLC offers unique flexibility in how it is structured and managed. Profits can be divided in creative ways that are not tied to capital contributions, and the company can be managed by its members (owners) or by a designated manager, who may not even be an owner. This makes it an ideal structure for many family-owned businesses.

The Critical Danger: Piercing the Corporate Veil

Simply forming a corporation or an LLC is not enough to protect you. You must operate it as a separate legal entity. If you fail to do so, a court can “pierce the corporate veil” and hold you personally liable for the business’s debts.

Common mistakes that can lead to this include:

  • Commingling Assets: Using your corporate checkbook to pay for personal expenses is a critical error that erases the line between you and your business.
  • Ignoring Formalities: Corporations are required by law to hold annual meetings and keep corporate minutes. Failing to follow these statutory requirements can jeopardize your liability protection.

If you are already in a lawsuit, it is too late to fix these past mistakes.

Making the Right Choice

Choosing and operating a business entity has significant legal and tax implications. It is essential to consult with both an experienced attorney and a CPA before making a decision. The structure of your business is a key component of your overall financial and asset protection plan.

If you have already formed an entity, it is wise to have your documents and procedures reviewed to ensure your personal assets are as protected as you think they are. Call our office at (919) 256-7000 to schedule a consultation.