Which Type of Entity Is Best To Use For Your New Business?

Starting a new business is exciting but the decisions you make in the beginning can have long-lasting impacts on your future profitability and success. If you’re ready to start your new for-profit business in the State of Kansas, here are a few basics on the various business entities available to you: 

Sole Proprietorship:
​
• Although arguably the least complicated way to set up your business, it also creates the greatest liability risk for the owner.
• No annual minutes are required and no reports or filings, other than income tax filings, have to be made with the State.
• With this form of business entity, the owner is 100% liable for the company debts and obligations. 

---

Creditors can try to collect the money they are owed by going after the owner’s personal assets.
• The owner is taxed on any profits at his/her personal income tax rate.

Partnership:

• Similar to the Sole Proprietorship, a partnership of two (2) or more owners functions much the same way, in that it is easy and cheap to set up and maintain. The owners can select a General Partnership, Limited Partnership, or Limited Liability Partnership.
• These partnership types can afford slightly more protection of personal assets from creditors, should the business fail.
• Partnerships are more expensive to maintain than sole proprietorships. In addition to the initial formation documents, they may require the creation of a Buy-Sell Agreement, and can necessitate annual report filings with the State. Oftentimes, the greater the number of individual owners, the higher the legal fees incurred, as more time is required to help the partners negotiate business terms before, during and after the life of the partnership.

Corporation:

• A corporation is a business entity comprised of three groups of individuals: shareholders, directors and officers.
• Ownership is divided into shares of stock and the owners are known as stockholders or shareholders.
• The shareholders elect a board of directors that are responsible for the management of the corporation.
• The board of directors appoint the officers who oversee the day-to-day operations.
• A corporation can be set up as a “C” corporation or an “S” corporation. The main difference between these two is in who can own stock and how they are taxed.
• There is a separation of the business assets from the stockholder’s personal assets which enhances liability protection from creditors.
• The corporation must be registered with the State and annual reports must be filed. An annual meeting of stockholders and directors is required as well as annual minutes memorializing the meetings.

Limited Liability Company:

• An LLC is not required to have officers who run the company. Its “members” (owners), or a “manager” who is selected by the members, run the company. The LLC is not obligated to have an annual shareholder meeting or prepare formal minutes of that meeting. 
• An LLC can choose to be taxed as a “C” corporation, “S” corporation, partnership or sole proprietorship; each option has its own benefits and drawbacks in terms of reducing and controlling taxes. 
• An LLC in Kansas offers arguably better liability protection from creditors than other types of entities.
• Compared to a corporation, LLCs are easier and cheaper to maintain over time. Corporate annual reports fees are higher than those for LLCs in the State of Kansas. Additionally, annual meetings and production of the subsequent meeting minutes (generally prepared by your attorney, for an additional fee) have to be done for corporations, but not LLCs. Less administrative requirements equates to less expense.

You should seek legal counsel to assist you with the formation of any of these business entities. It is recommended that your attorney work closely with your accountant to determine the entity that will be most advantageous for your tax situation. If you use an attorney other than your estate planning attorney to form your new business, be sure to notify your estate planning attorney of this new entity. You will want to ensure this new asset is included in your estate plan. You can learn more about Kansas business entities by visiting the Kansas Secretary of State website at: https://portal.kansas.gov/business/structure/ 

For more detailed questions regarding business entities in the State of Kansas, please contact Davis & McCann, P. A., Dodge City, KS. We are members of Wealth Counsel, a national consortium of Estate Planning Attorneys and focus our practice on providing clients with the best legal advice on estate planning, Medicaid and Long-term Care Planning, Business Formation, Family Business/Small Business Succession Planning, Probate, Trust Administration, Real Estate Transactions, and related matters.