With the new year comes new goals. If this year’s goals involve starting your own business, growing your existing business, or ensuring that your existing business is reaching its maximum potential, there are several important decisions that you will need to make. One of the first and most important decisions to make for your new or existing business is what type of business structure is right for you. Louisiana recognizes several types of business entities. Each provides its own advantages and disadvantages, which need to be carefully weighed. Is your primary concern flexibility? Protection from legal liability? Tax benefits? All of these factors come in to play when choosing to start or grow your business.
The most common business entities in Louisiana include:
- Sole proprietorships
- Limited liability companies (LLCs)
A sole proprietorship is the simplest type of business. A sole proprietorship will typically involve an individual running a business as a trade name. Sole proprietorships often use a D/B/A (doing business as) to identify itself. There are no formal requirements of registering a sole proprietorship with the Louisiana Secretary of State’s office. Running your business as a sole proprietorship allows you to build goodwill in the name of the business while providing ultimate flexibility. However, the sole proprietorship is not a separate legal entity, so you do not have any sort of legal liability protections. An individual conducting business as a sole proprietorship is personally liable for any debts or damage awards incurred by the business.
A partnership is similar to a sole proprietorship; however, it comprises two or more people, and has specific rules when it comes to decision-making, profit sharing, etc. Like a sole proprietorship, a partnership does not require a formal written partnership agreement. However, a partner is not only legally responsible for their own actions, but also for the actions of the other partners in the partnership. Accordingly, it is always prudent when entering a partnership to be proactive in determining how the partnership will operate, how responsibilities will be managed, and how liabilities and profits will be split. A written partnership agreement is essential to ensuring that you and your business partner(s) are fully aware of everyone’s rights and responsibilities under of the partnership agreement, which can help avoid hurt feelings and costly litigation down the road.
A corporation is a more complex legal structure that is considered by law to be a separate legal entity (sometimes referred to as a juridical person). Corporations provide legal protections for its shareholders, directors, officers and employees, and comes with certain tax advantages. It also provides you with the ability to offer stock in the corporation, which can be used to raise money, transfer ownership, etc. Corporations require their directors and officers to follow certain corporate formalities in order to confer the benefits outlined above. Failure to comply with the corporate formalities required by law may result in litigation to “pierce the corporate veil,” whereby a litigant asks the court to disregard the corporation and allow a claim directly against the individual directors, officers, and/or shareholders.
LImited Liability Companies
A limited liability company is a hybrid business entity that shares characteristics of both the partnership and the corporation. Members of an LLC receive the legal protections afforded by a corporation (no personal liability absent extraordinary circumstances), while allowing more flexibility in management. Like a corporation, a limited liability company is subject to veil piercing in unusual situations. An operating agreement outlining the ownership, management, and rights and responsibilities of its members, is essential to maximizing the legal protections afforded to a limited liability company.
If you need help determining what type of business structure is right for you, or want to ensure that your current business is obtaining the maximum legal benefits, contact one of our experienced business litigation attorneys today at (225) 282-0602 or via email at [email protected].
While the information on this page is about legal issues, it is not legal advice. Please always be sure to consult your attorney concerning any specific legal questions that you may have.