Q: I recently started a new business in New Hampshire. What is the best way to set up my business that is simple, yet enables me to grow the business in the future?
A: Congratulations on starting your own business! There are many ways to structure a new business in New Hampshire. A sole proprietorship is the simplest business to form and operate; however, often a limited liability company, or “LLC,” is preferable because it provides for the liability protection of a corporation and the tax advantages of a partnership.
1) Limited liability: One of the key benefits of the LLC is that it separates the business from the individual both financially and legally. In a sole proprietorship, your assets and the business assets are one and the same, meaning your home, your car, even your personal bank accounts are exposed to creditors of your business. As the owner of an LLC, your liability is limited to the amount of your investment in the business (assuming you have not personally guaranteed any debt).
2) Growth and succession planning: As your business grows, you may want to take on additional partners or delegate roles and responsibilities. Forming an LLC initially, with clear and predetermined terms, can help minimize the risk inherent in sharing control of your business. Forming an LLC with multiple owners (referred to as “members”) can be much more complicated and cumbersome compared to adding members to an existing LLC. An LLC can also survive long after you retire or sell the business.
3) Taxation: In a sole proprietorship, the profits and losses from the business are reported on your individual tax return; this is called “pass-through” taxation. An LLC owner can choose whether to be taxed as an S corporation, a C corporation or as a pass-through. While most LLC owners choose pass-through taxation, this flexibility to choose the method that works best for your business is an important advantage to forming an LLC.
4) The final reason an LLC may be preferable to a sole proprietorship is that it sends the message that you are running a “real” business. Banks and other creditors, suppliers and even significant customers may be more likely to do busines or provide better terms to an LLC. Operating as an LLC also ensures that your business will be the only business with that name in New Hampshire.
Ultimately, the choice depends on your individual facts and circumstances and you should consult your accountant and legal counsel to go through the specifics of your business. Best of luck!
Amelia Elacqua can be reached at [email protected]
Know the Law is a biweekly column sponsored by McLane Middleton, Professional Association. We invite your questions about business law. Questions or ideas for future columns should be addressed to: McLane Middleton, 900 Elm St., Manchester, NH 03101 or emailed to [email protected] Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.