What Legal Form Should My Business Take?

Starting a new business is an exciting experience. Before you can throw open your doors or
begin advertising, you need to legally establish the business. This requires that you choose a
business entity type.

In North Carolina, business owners have several options from which to choose. Picking the best
type is often complicated, but we will go through only a few of the considerations as we look at
the most popular business forms our clients choose.

Sole Proprietorship
Some people might not think that a sole proprietorship is a business form at all. Basically, you
use your Social Security Number as your business tax ID and report your business income on
Schedule C of your individual tax return.
The primary benefit of a sole proprietorship is that it is easy to set up. However, there are
negatives. Principally, you are personally liable for any business debts and obligations. This
means that if your business is sued, the plaintiff can get at your personal assets.

Partnership
Two or more people can agree to jointly create and operate a business for profit by creating a
partnership. This is also a relatively easy business to create, though to do it right you will need to
draft a detailed partnership agreement. Partners are also individually liable for partnership debts
and obligations, which can make this a risky business form to adopt.

Corporation
A corporation is owned by shareholders but managed by officers and a board of directors.
Corporations provide limited liability to owners, meaning that if the company is sued, the
plaintiff can not reach the personal assets of each shareholder.
You form a corporation by filing Articles of Incorporation with the state. Corporations usually
need detailed bylaws that will describe, among other things, the company’s purpose and who has
the power to run it.
With respect to taxation, there are two types of corporations:
● C-Corporations, which are taxed at both the corporate and the individual level.
● S-Corporations, which are taxed at only the individual level. To qualify as an S Corp, a
business must meet strict requirements, such as not having more than 100 shareholders
and having only one class of stock.

Limited Liability Companies (LLCs)

LLCs are increasing in popularity, especially for small businesses. They have fewer
recordkeeping requirements compared to corporations but also provide limited liability to the
owners. LLCs are also taxed at only the individual level.
To create an LLC, you will need to file paperwork with the state. You should also have an
operating agreement that will explain the nuts and bolts of how the LLC will be run.

Starting a Business? Reach out to Us Today

If you are starting a business, you should meet with an attorney to discuss which business form is
best for you. The choice is often not clear, so we need to discuss your ultimate goals for the
business, including how you intend to raise money and grow in the future.
For assistance, please contact Hodges Coxe Potter & Phillips today. One of our Wilmington
business formation attorneys can meet with you to discuss your plans. Call 910-772-1678.