By Michael S. Byrd, JD, Partner, ByrdAdatto
Choosing an entity for your business can be overwhelming. Clients often seek ByrdAdatto’s advice, confused by the choices and the process. From partnerships, sole proprietorships and corporations to limited liability companies (LLCs), each entity offers advantages and disadvantages, depending on your unique business model.
Choosing an entity should be informed by your current business strategy, in conjunction with your vision for the company for the future. Among other things, the choice of entity can affect tax structure, capital raising, initial public offerings, mergers and acquisitions, and distribution structure.
While forming an entity without strategic thought and input stems could potentially cause you to choose the wrong structure, tactical mistakes often are made in the formation process. Many clients don’t realize that there actually are two separate filings to consider: first with the state, and second with the U.S. Internal Revenue Service (IRS).
Filing With the State
State filings are nuanced and often dependent on options available in a specific state. Entities owned by a professional requiring licensing—by the state or other jurisdiction—may have more limited options. For example, in California, a medical practice must file as a corporation, and may be required to file additional documents with the state’s medical board. Otherwise, professional entity choices can include:
- Professional corporation (PC);
- Professional medical corporation (PMC);
- Service corporation (SC);
- Professional association (PA);
- Professional limited liability company (PLLC);
- Limited liability partnership (LLP); and
- Unincorporated sole proprietorship.
Overall, LLCs—and their professional counterparts, PLLCs—are the most commonly formed entities. An LLC is flexible and can be customized to different business models, while also leaving open a menu of tax options. In circling back to the strategy and vision considerations, the LLC’s flexibility tends to be a great starting point when the vision for the business is uncertain.
The corporation as an entity choice has its place in more complicated businesses that raise outside funding from private equity or have a plan to become a publicly traded company.
Filing With the IRS
We stress to clients that an entity choice at the state level dictates your choices with the IRS, and thus how you will be taxed. For example, filing as a corporation limits your choices with the IRS to either a C-corp or an S-corp. If you form a partnership (limited, general or limited liability), your choices with the IRS will be limited to a partnership. The popularity of the LLC for tax election with the IRS again rests with its flexibility. An LLC can choose to be taxed as a corporation (C-corp or S-corp), a partnership (as long as there is more than one owner) or a disregarded entity (if there is one owner).
There are many pitfalls to avoid and variables to consider in choosing the right corporate entity for your business. At ByrdAdatto, we advocate simplification. Much like reducing a fraction to its lowest common denominator, we aim to provide simple solutions on complicated topics.
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With his background as both a litigator and transactional attorney, Michael Byrd brings a comprehensive perspective to business and health care issues. He has been named to Texas Rising Stars and Texas Super Lawyers, published by Thompson Reuters, for multiple years (2009-2018) and recognized as a Best Lawyer in Dallas by D Magazine (2013, 2016, 2017, 2018). He routinely lectures at continuing medical education seminars on the various business and legal issues that medical professionals face.