Utah Business Entities

Utah Business Entity

When we talk about business entities, we are referring to the type or structure of a business as opposed to what the business does. How a business is structured affects how taxes are paid, liabilities are determined, and of course, paperwork. Business entities—organizations created by one or more people to carry on a trade—are usually created at the state level, often by filing documents with a state agency such as the Secretary of State or Utah Department of Commerce.

Business entities are subject to taxation and must file a tax return.
For federal income tax purposes, some business entities are, by default, considered not to be separate from their owner. Such is the case with sole proprietors and single-member limited liability companies. The income and deductions related to these entities are normally reported on the same tax return as the owner of the business. The IRS calls these disregarded entities because it “disregards” the separate name and structure of the business. However, a disregarded entity can choose to be treated as if it were a separate entity. This is done by making an Entity Classification Election using Form 8832 and filing this form with the IRS. The purpose of this form is to choose a classification other than the default classification provided by federal tax laws.

Distinguishing between the actual organizational structure created under state law and the tax classification can cause confusion, especially if the same words are used for both concepts. Colloquially, when accountants talk about “entities” or “entity returns,” they are referring to tax returns other than for individual people.

In simplest terms, a business entity is an organization created by an individual or individuals to conduct business, engage in a trade, or partake in similar activities. There are various types of business entities—sole proprietorship, partnership, LLC, corporation, etc.—and a business’s entity type dictates both the structure of that organization and how that company is taxed. When starting a business, one of the first things you want to do is choose the structure of your company—in other words, choose a business entity type. This decision will have important legal and financial implications for your business. The amount of taxes you have to pay depends on your business entity choice, as does the ease with which you can get a small business loan or raise money from investors. Plus, if someone sues your business, your business entity structure determines your risk exposure. State governments in the U.S. recognize more than a dozen different types of business entities, but the average small business owner chooses between these six: sole proprietorship, general partnership, limited partnership (LP), limited liability company (LLC), C-corporation, and S-corporation.

Types of Business Entities

As we mentioned above, at a very basic level, a business entity simply means an organization that has been formed to conduct business. However, the type of entity you choose for your business determines how your company is structured and taxed. For example, by definition, a sole proprietorship must be owned and operated by a single owner. If your business entity type is a partnership, on the other hand, this means there are two or more owners. Similarly, if you establish a business as a sole proprietorship, this means for tax purposes, you’re a pass-through entity (the taxes are passed onto the business owner). Conversely, if you establish your business as a corporation, this means the business exists separately from its owners, and therefore, pays separate taxes. Generally, to actually establish your business’s entity structure, you’ll register in the state where your business is located. With all of this in mind, the chart below summarizes the various entity types business owners can choose from:

Business Entity Type

• Sole proprietorship: Unincorporated business with one owner or jointly owned by a married couple
• General partnership: Unincorporated business with two or more owners
• Limited partnership: Registered business composed of active, general partners and passive, limited partners
• Limited liability partnership: Partnership structure that shields all partners from personal liability
• Limited liability limited partnership: Type of limited partnership with some liability protection for general partners
• Limited liability company (LLC): Registered business with limited liability for all members
• Professional limited liability company: LLC structure for professionals, such as doctors and accountants
• C-corporation: Incorporated business composed of shareholders, directors, and officers
• S-corporation: Incorporated business that is taxed as a pass-through entity
• Professional corporation: Corporate structure for professionals, such as doctors and accountants
• B-corporation: For-profit corporation that is certified for meeting social and environmental standards
• Nonprofit: Corporation formed primarily to benefit the public interest rather than earn a profit
• Estate: Separate legal entity created to distribute an individual’s property after death
• Municipality: Corporate status given to a city or town
• Cooperative: Private organization owned and controlled by a group of individuals for their own benefit.

As you can see, there are numerous types of business entities; however, most business owners will choose from the six most common options: sole proprietorship, general partnership, limited partnership, LLC, C-corporation, or S-corporation. Below, we’ve explained each of these popular business entity types, as well as the pros and cons of choosing each particular structure for your company.

Sole Proprietorship

A sole proprietorship is the simplest business entity, with one person (or a married couple) as the sole owner and operator of the business. If you launch a new business and are the only owner, you are automatically a sole proprietorship under the law. There’s no need to register a sole proprietorship with the state, though you might need local business licenses or permits depending on your industry. Freelancers, consultants, and other service professionals commonly work as sole proprietors, but it’s also a viable option for more established businesses, such as retail stores, with one person at the helm.

Pros of Sole Proprietorship

• Easy to start (no need to register your business with the state).
• No corporate formalities or paperwork requirements, such as meeting minutes, bylaws, etc.
• You can deduct most business losses on your personal tax return.
• Tax filings is easy—simply fill out and attach Schedule C-Profit or Loss From Business to your personal income tax return.

Cons of Sole Proprietorship
• As the only owner, you’re personally responsible for all of the business’s debts and liabilities—someone who wins a lawsuit against your business can take your personal assets (your car, personal bank accounts, even your home in some situations).
• There’s no real separation between you and the business, so it’s more difficult to get a business loan and raise money (lenders and investors prefer LLCs or corporations).
• It’s harder to build business credit without a registered business entity.
Sole proprietorships are by far the most popular type of business structure in the U.S. because of how easy they are to set up. There’s a lot of overlap between your personal and business finances, which makes it easy to launch and file taxes. The problem is that this same lack of separation can also land you in legal trouble. If a customer, employee, or another third party successfully sues your business, they can take your personal assets. Due to this risk, most sole proprietors eventually convert their business to an LLC or corporation.

General Partnership (GP)

Partnerships share many similarities with sole proprietorships—the key difference is that the business has two or more owners. There are two kinds of partnerships: general partnerships (GPs) and limited partnerships (LPs). In a general partnership, all partners actively manage the business and share in the profits and losses. Like a sole proprietorship, a general partnership is the default mode of ownership for multiple-owner businesses—there’s no need to register a general partnership with the state.
Pros of General Partnership
• Easy to start (no need to register your business with the state).
• No corporate formalities or paperwork requirements, such as meeting minutes, bylaws, etc.
• You don’t need to absorb all the business losses on your own because the partners divide the profits and losses.
• Owners can deduct most business losses on their personal tax returns.
Cons of General Partnership
• Each owner is personally liable for the business’s debts and other liabilities.
• In some states, each partner may be personally liable for another partner’s negligent actions or behavior (this is called joint and several liability).
• Disputes among partners can unravel the business (though drafting a solid partnership agreement can help you avoid this).
• It’s more difficult to get a business loan, land a big client, and build business credit without a registered business entity.
Most people form partnerships to lower the risk of starting a business. Instead of going all-in on your own, having multiple people sharing the struggles and successes can be very helpful, especially in the early years. This being said, if you do go this route, it’s very important to choose the right partner or partners. Disputes can seriously limit a business’s growth, and many state laws hold each partner fully responsible for the actions of the others. For example, if one partner enters into a contract and then violates one of the terms, the third party can personally sue any or all of the partners.

Limited Partnership (LP)

Unlike a general partnership, a limited partnership is a registered business entity. To form an LP, therefore, you must file paperwork with the state. In an LP, there are two kinds of partners: those who own, operate, and assume liability for the business (general partners), and those who act only as investors (limited partners, sometimes called “silent partners”). Limited partners don’t have control over business operations and have fewer liabilities. They typically act as investors in the business and also pay fewer taxes because they have a more tangential role in the company.

Pros of Limited Partnership

• An LP is a good option for raising money because investors can serve as limited partners without personal liability.
• General partners get the money they need to operate but maintain authority over business operations.
• Limited partners can leave anytime without dissolving the business partnership.
Cons of Limited Partnership
• General partners are personally responsible for the business’s debts and liabilities.
• More expensive to create than a general partnership and requires a state filing.
• A limited partner may also face personal liability if they inadvertently take too active a role in the business.
Multi-owner businesses that want to raise money from investors often do well as LPs because investors can avoid liability. You might come across yet another business entity structure called a limited liability partnership (LLP). In an LLP, none of the partners have personal liability for the business, but most states only allow law firms, accounting firms, doctor’s offices, and other professional service firms to organize as LLPs. These types of businesses can organize as an LLP to avoid each partner being liable for the other’s actions. For example, if one doctor in a medical practice commits malpractice, having an LLP lets the other doctors avoid liability.

C-Corporation

A C-corporation is an independent legal entity that exists separately from the company’s owners. Shareholders (the owners), a board of directors, and officers have control over the corporation, although one person in a C-corp can fulfill all of these roles, so it is possible to create a corporation where you’re in charge of everything. This being said, with this type of business entity, there are many more regulations and tax laws that the company must comply with. Methods for incorporating, fees, and required forms vary by state.
Pros of C-corporation
• Owners (shareholders) don’t have personal liability for the business’s debts and liabilities.
• C-corporations are eligible for more tax deductions than any other type of business.
• C-corporation owners pay lower self-employment taxes.
• You have the ability to offer stock options, which can help you raise money in the future.
Cons of C-corporation
• More expensive to create than sole proprietorships and partnerships (the filing fees required to incorporate a business range from $100 to $500 based on which state you’re in).
• C-corporations face double taxation: The company pays taxes on the corporate tax return, and then shareholders pay taxes on dividends on their personal tax returns.
• Owners cannot deduct business losses on their personal tax returns.
• There are a lot of formalities that corporations have to meet, such as holding board and shareholder meetings, keeping meeting minutes, and creating bylaws.

Most small businesses pass over C-corps when deciding how to structure their business, but they can be a good choice as your business grows and you find yourself needing more legal protections. The biggest benefit of a C-corp is limited liability. If someone sues the business, they are limited to taking business assets to cover the judgment—they can’t come after your home, car, or other personal assets. This being said, corporations are a mixed bag from a tax perspective—there are more tax deductions and fewer self-employment taxes, but there’s the possibility of double taxation if you plan to offer dividends. Owners who invest profits back into the business as opposed to taking dividends are more likely to benefit under a corporate structure.
S-Corporation
An S-corporation preserves the limited liability that comes with a C-corporation but is a pass-through entity for tax purposes. This means that, similar to a sole prop or partnership, an S-corp’s profits and losses pass through to the owners’ personal tax returns. There’s no corporate-level taxation for an S-corp.
Pros of S-corporation
• Owners (shareholders) don’t have personal liability for the business’s debts and liabilities.
• No corporate taxation and no double taxation: An S-corp is a pass-through entity, so the government taxes it much like a sole proprietorship or partnership.
Cons of S-corporation
• Like C-corporations, S-corporations are more expensive to create than both sole proprietorships and partnerships (requires registration with the state).
• There are more limits on issuing stock with S-corps vs. C-corps.
• You still need to comply with corporate formalities, like creating bylaws and holding board and shareholder meetings.
In order to organize as an S-corporation or convert your business to an S-corporation, you have to file IRS form 2553. S-corporations can be a good choice for businesses that want a corporate structure but like the tax flexibility of a sole proprietorship or partnership.

Limited Liability Company (LLC)

A limited liability company takes positive features from each of the other business entity types. Like corporations, LLCs offer limited liability protections. But, LLCs also have less paperwork and ongoing requirements, and in that sense, they are more like sole proprietorships and partnerships. Another big benefit is that you can choose how you want the IRS to tax your LLC. You can elect to have the IRS treat it as a corporation or as a pass-through entity on your taxes.
Pros of LLC
• Owners don’t have personal liability for the business’s debts or liabilities.
• You can choose whether you want your LLC to be taxed as a partnership or as a corporation.
• Not as many corporate formalities compared to an S-corp or C-corp.
Cons of LLC
• It’s more expensive to create an LLC than a sole proprietorship or partnership (requires registration with the state).
LLCs are popular among small business owners, including freelancers, because they combine the best of many worlds: the ease of a sole proprietorship or partnership with the legal protections of a corporation.

Business Entity Lawyer

When you need legal help with a business entity in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

Ascent Law LLC

4.9 stars – based on 67 reviews


Recent Posts

Foreclosure Lawyer Lindon Utah

What Are The Grounds For Divorce In Utah?

Copyright Enforcement

Domestic Partners

Notice of Default

Utah Adoption Law Firm

Utah Business Entity

Utah Business Entity

Business entities are organizations formed by one or more persons. Since they are formed at the state level, they must comply with state laws. In most states, a business owner is required to file documents with a particular state agency, like the office of the Secretary of State, in order to legally set up their business. Business entity and legal entity are used interchangeably. A legal entity is distinct from a natural person. A legal entity is recognized by a government. It can enter contracts in its own name. A legal entity can sue and be sued. It can maintain bank accounts and buy insurance. In short, a legal entity can usually conduct all the commercial activity that an individual can.

Sole Proprietorship

This is a business run by one individual for his or her own benefit. It is the simplest form of business organization. Proprietorships have no existence apart from the owners. The liabilities associated with the business are the personal liabilities of the owner, and the business terminates upon the proprietor’s death. The proprietor undertakes the risks of the business to the extent of his/her assets, whether used in the business or personally owned. Single proprietors include professional people, service providers, and retailers who are “in business for themselves.” Although a sole proprietorship is not a separate legal entity from its owner, it is a separate entity for accounting purposes. Financial activities of the business (e.g., receipt of fees) are maintained separately from the person’s personal financial activities (e.g., house payment).

Partnerships-General and Limited

A general partnership is an agreement, expressed or implied, between two or more persons who join together to carry on a business venture for profit. Each partner contributes money, property, labor, or skill; each shares in the profits and losses of the business; and each has unlimited personal liability for the debts of the business. Limited partnerships limit the personal liability of individual partners for the debts of the business according to the amount they have invested. Partners must file a certificate of limited partnership with state authorities.

Limited Liability Company (LLC)

An LLC is a hybrid between a partnership and a corporation. Members of an LLC have operational flexibility and income benefits similar to a partnership but also have limited liability exposure. While this seems very similar to a limited partnership, there are significant legal and statutory differences. Consultation with an attorney to determine the best entity is recommended.

Corporation

A corporation is a legal entity, operating under state law, whose scope of activity and name are restricted by its charter. Articles of incorporation must be filed with the state to establish a corporation. Stockholders’ are protected from liability and those stockholders who are also employees may be able to take advantage of some tax-free benefits, such as health insurance. There is double taxation with a C corporation, first through taxes on profits and second on taxes on stockholder dividends (as capital gains).

Small Business Corporation (S-Corporation)

Subchapter S-corporations are special closed corporations (limits exist on the number of members) created to provide small corporations with a tax advantage, if IRS Code requirements are met. Corporate taxes are waived and reported by the owners on their individual federal income tax returns, avoiding the “double taxation” of regular corporations.

What Are ‘Disregarded’ Business Entities?

Business entities are often subject to taxation, so the business owners must file a tax return for those businesses. Often, the owner of a single-member limited liability company or a sole proprietorship only needs to file a single tax return. In this case, the business entity and the count as one and the same. Also, the IRS “disregards” those business entities because the owner only needs to report their personal income and deductions. When the business owner files their taxes, they will report their business expenses and income on a Schedule C form along with their personal Form 1040. Alternatively, a one-member business could be treated as a separate entity. If the owner of the business chooses to go that route, they will have to fill out a Form 8832 to declare an Entity Classification Election and file the form with the IRS. Unless the owner of the sole proprietorship or single-person LLC files the Form 8832 for their business, that business entity will fall into the default classification of a disregarded entity.

How to Choose Business Entities

Once you know where you want to register your business, you must choose your type of legal entity. While legal entities are not quite like ordering food off a menu after you choose the restaurant, you do have options.

Cost of Incorporation

Registering a legal entity costs money: sometimes a little; sometimes a lot. Costs include the filing fee, renewal fees, professional fees, and franchise taxes. These are direct cost.

• Filing fees: Every jurisdiction imposes a filing fee. Fees change frequently. There are often fees for particular kinds of filings. Fees might also vary by type of entity. Review the fees for your jurisdiction and entity type carefully.

• Renewal fees: Registering a company is not a onetime event. You must renew the registration to keep it current. Not all registration renewals are annual. Some jurisdictions do not require renewal for several years. Simply do the math to annualize registration fees to compare them from jurisdiction to jurisdiction or entity type to entity type.

• Professional fees: There are three types of professionals you may need to pay: lawyer, accountant, and registered agent. Legal fees for incorporation can be modest or breathtaking. Business lawyers should be able to tell you about the costs for incorporation in your jurisdiction before starting any work. Legal fees can rise quickly to cover complexities beyond the registration. Fees for accountants follow a similar pattern.

Providing initial tax advice and setting up your accounting might be one cost, but getting help with complex asset transfers, foreign accounts, and the like, can quickly raise the costs. Good legal and accounting advice early in the process is money well spent. Registered agents, sometimes called “local agents”, are people or companies that are empowered to accept legal notices on behalf of the business. The registered agent address is published to the world. While you can often be your own registered agent in your own jurisdiction, you might choose to use a registered agent so that any legal notices do not get mishandled.

• Franchise tax: Not all jurisdictions impose a franchise tax, but many do. A franchise tax is basically a tax on the business’ balance sheet. It might be tied to assets or to net worth. The idea is that your registration and renewal fees are determined in part by the assets of the business. If the entity operates an “asset light” business, like consulting, then the franchise tax might be low for a long time. However, for an asset intensive business with equipment, real estate, or large cash balances, the franchise tax will be a material consideration. This is an area where good accounting advice about recording the value of your assets is helpful.

Ease of Incorporation

It is not difficult or time consuming to incorporate many entities in jurisdictions that encourage incorporation. The time and effort, however, can vary. Your local lawyer will have the most accurate estimate, but there several factors to consider: total time, number of steps, incorporator requirements, minimum capital required, and the number and type of investors.You can use the World Bank data on business entity formation to get benchmarks to help you estimate. While the World Bank data includes some sub national jurisdictions, like states in India, it does not include any data for individual states in the United States. You cannot compare Delaware to California and New York, for example.

Management Requirements

Some jurisdictions and entity types require named officers or certain board structures. You can often satisfy those compliance requirements without interfering with your management plan for operating the business. For example, if you must name a President and Secretary as authorized signers and you have a co-founder, then one of you can serve one role while the other serves the other function. This choice does not necessarily have any effect on the management team you put in place. Some jurisdictions also impose a dual board structure where one board is charged with governance matters and the other is the operational management board. Before chasing a dual board structure, make sure that it is required in your jurisdiction for your size and type of business.

Tax and Financial Objectives

One of the most important factors when choosing a legal entity is the tax treatment of that entity’s income. The place to start is the financial objective for the business: current income or growth. Of course, everyone wants both income and growth, but it is a question of priority and scale.

Types of taxes

Jurisdictions may impose one or more of the following taxes: personal income, business income, franchise, property, consumption, and capital gains. Incorporating a business will probably affect your personal income. It might go up or go down, depending on the choices you make and your objectives. The place of incorporation may also impose a tax on the business’ assets or net worth in the form of a franchise tax. A franchise tax is typically imposed at the time of registration and renewal by the jurisdiction where the business is registered. Jurisdiction also strongly influences property taxes. Any layer of government might impose taxes on property the business owns or acquires. If the business is asset intensive, then property taxes can influence where you decide to incorporate and operate. Consumption taxes come in two flavors: sales and use taxes (“Sales tax”) or value-added taxes (“VAT”). End consumers pay sales tax that is collected by a retailer who sends it to the taxing authority. VAT, on the other hand, is paid at each step of the supply chain. Sales and VAT regimes impose different administrative burdens on your business. Sales tax is the consumption tax used by states in the US. Finally, capital gains taxes warrant consideration. A business might generate capital gains, which are profits on the sales of things not in the ordinary course of your business, such as selling a building. But the most significant capital gains event is the sale of the business after it is wildly successful. How will the jurisdiction tax that event? As a practical matter, there might not be much choice about where to live and run the business.

International taxes

A quick word about a long, complex subject: international income taxes. If a business sells products and services across national boundaries, tax advice from a tax professional is critical. Countries tend to take either a territorial or residence approach to taxation of income earned outside the business’ home countries. The territorial system only taxes income earned within the country. The residence system taxes income earned globally for every company residing in the territory.

So knowing where your customers are and how you will reach them can affect your income tax bill and therefore the financial success of your business, and ultimately where you decide to incorporate your business.

Business Entity Compliance and Maintenance

Forming a business is a onetime event that creates a long string of maintenance tasks for as long as the entity is a going concern. Limiting liability and asset protection are primary objectives for forming a business entity. Maintenance preserves those benefits. Without careful maintenance of the legal entity, it might not provide protection when it is needed most.

Over time things change for every business entity. Those changes are easily filed and forgotten. To keep in compliance and reduce risk from legal entity management, there are five buckets of information to track: entity summary data, company documents, filing requirements, officers and directors, and owners.

Considerations for deciding the most suitable business entity

• Sole Proprietorship: In this situation, one owns the business oneself and can reap whatever financial benefits come from it. One can make decisions on one’s own and guide the growth of the business without having to consult with any other entity. This also means that no other employee will ever have the chance to have own stocks. This may sound pretty good. But be aware that with a sole proprietorship, there is no distinction between one’s business life and one’s personal life as far as taxes and other financial obligations are concerned. As far as the government is concerned, proprietor and the firm are one and the same. This could have negative repercussions on the proprietor. Moreover, as a sole proprietor, one’s business will exist only as long as one continues to own it.

• Partnership: In the same way as a sole proprietorship, a partnership draws no financial distinction between a partner’s personal and business finances. There are also inherent risks in partnerships. It is important to draft a “partnership agreement” to outline what happens if there is a disagreement among partners, if one wants to end the partnership, if one of the partners dies, etc.

• Limited Liability Company : LLC’s are extremely flexible, and can be used for a very wide range of businesses. The members (equivalent to shareholders or partners) can, but need not, have limited liability; can, but need not have, managers (equivalent to directors and officers) and can elect to be taxed either as corporations, or as partners (if they have two or more members) or be disregarded for tax purposes like a sole proprietorship.

• Business Corporation: Becoming “incorporated” brings with it many advantages. Your business becomes a separated entity (from you) and is chartered by the state in which it is located. This means that your business can enter into contracts, it pays taxes of its own, it can be sued. The owner becomes a shareholder and has the option to sell the business if things don’t work out for continued ownership. The negative piece of this option is that it is more expensive than the others and takes a bit more time. It is subject to much more compliance as compared to a Sole Proprietorship or Partnership or Limited Liability Company.

Business Lawyer Free Consultation

When you need legal help with a Utah Business Entity, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

Ascent Law LLC

4.9 stars – based on 67 reviews


Recent Posts

Is It Necessary To Copyright A Logo?

ATV Accident Lawyer Bluffdale Utah

Enforcing Grandparent Visitation With Contempt Of Court

Dirty Utah Custody Case Tricks To Watch Out For

Annulment In West Jordan Utah

Local Divorce Attorney