Choosing Among Sole Proprietorships, Single-Shareholder Corporations And Single-Member LLCs For New Businesses

Choosing Among Sole Proprietorships, Single-Shareholder Corporations And Single-Member LLCs For New Businesses

Choosing Among Sole Proprietorships, Single-Shareholder Corporations And Single-Member LLCs For New Businesses

Q: I’m starting a new business in New Hampshire. I will be its only owner. Should my business be a sole proprietorship, a single-shareholder corporation or a single-member LLC?

A: The big advantage of single-shareholder corporations and single-member LLCs is that they provide you with a statutory liability shield. With very few exceptions, this shield will protect your personal assets from claims against your business unless you yourself engaged in the misconduct that led to the claim. Sole proprietorships don’t provide liability shields.
Next month, I’ll provide you with guidelines for deciding whether to form your new business as a single-shareholder corporation or, instead, as a single-member LLC.  Here are the three main situations in which, at least from a non-tax viewpoint, you should form it as a sole proprietorship:

  1. Only you will work in your business, and you will have no employees. Obviously, in this situation, any alleged misconduct of your business will be attributable to you personally.
  2. You will not be working closely with other individuals or entities whom third parties might claim are your partners. If the third parties succeed in this claim, you may be personally liable for the misconduct of your “partner” (even though he’s not really your partner at all).
  3. You meet the above two tests, and your business will be a party to business contracts on which you are not a personal guarantor. For example, if you do business as a single-member LLC and your business lease is in the name of your LLC and you’re not a guarantor of the lease, then, if your business defaults on the lease, you won’t have to cover the default. But, as you probably know, most landlords insist that individuals who lease real property from them guarantee these leases.

What is the impact of tax on your choice between a sole proprietorship, a single-member LLC and a single-shareholder corporation? That, too, is a subject I’ll address in a future column.
-by John Cunningham, Esq. (lawjmc@comcast.net; www.johncunninghamonnhllcs.com)
 

About the Author

John Cunningham is a N.H. business lawyer whose practice is focused on LLC law and tax. He chaired the N.H. Business and Industry Association committee that drafted the Revised New Hampshire Limited Liability Company Act, a radical revision of New Hampshire LLC law that went into effect on January 1st. LLCs are, by a wide margin, the entities of choice for N.H. business start-ups.