When an individual or group of individuals decides to form a business there are many options from which to choose. The types of entities include proprietorships, partnerships, corporations and limited liability companies. Within each of these there are choices to be made as well.
The first and most important step in the process is to think about the business goals of the company. What type of business are you planning? Do you want to and plan to grow? How many people are involved? Will you seek third party financing? Will you have employees? Will you seek outside investment? And finally, what is your exit strategy?
Sole Proprietorships
The primary advantages of Sole Proprietorships are that there is one point of taxation – all income is recognized as regular W-2 income- and the low cost or organization.
The primary disadvantages are there is unlimited liability (although you may be able to acquire insurance to protect against some losses) and it is not a separate entity.
Every sole proprietorship doing business in New Hampshire under a name other than their own must register that name as a d/b/a (NH RSA 349:1 et seq). The cost of filing is $50.00. The name chosen shall remain valid for a period of five (5) years.
Partnerships
A partnership is an association of two or more natural or artificial persons carrying on a business together with the intent to share its profits.
Because of the emergence of limited liability companies there is almost no reason to form a partnership. For this reason we will spend little time discussing them.
Corporations
Business corporations and their formation are governed by New Hampshire RSA 293-A.
Regardless of whether you choose a Subchapter “C” corporation or a Subchapter “S” corporation, the primary reason or advantage sought by those choosing to incorporate is the limitation of liability.
As part of the formation or incorporation process, the people forming the entity must choose a name and reserve it with the Secretary of State’s office. The name must include the word corporation, incorporated, limited or any abbreviation thereof.
S corporations are more common than C. As companies evolve and grow they may elect to terminate their S status and be treated as a C corporation by the IRS.
The primary advantages of an S corporation are, (i) the entity provides limitation of liability while allowing for pass-through tax benefit, (ii) there is a continuity of existence and (iii) the shares are easily transferable.
The primary disadvantages are, (i) non-resident aliens, corporations and most trusts cannot be shareholders, (ii) there is only one class of shares; no capital structuring flexibility, may limit investment options and limit access to capital, (iii) there can not be more than 75 shareholders and (iv) it must have calendar year for the fiscal year.
Limited Liability Companies
Limited Liability Companies are governed by New Hampshire RSA 304-C.
A primary advantage of forming an LLC is that an LLC allows for a flexible treatment of losses, gains, voting rights and percentage of ownership that corporations do not.
However with the uncertainty of the recent changes in the tax laws in New Hampshire and the possibility of a “double tax “ in distributions, there may be some reasons to consider not forming an LLC without some careful consideration and consultation with an accountant and a lawyer.
Paul D. Creme is an attorney with Hamblett & Kerrigan PA. His practice is focused on business and corporate law. Of particular interest are the areas of software and emerging technologies. You can reach Attorney Creme at [email protected].