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Which Legal Entities are Best for Main Street Businesses?

As local storefronts prepare for Small Business Saturday tomorrow, entrepreneurs with an unincorporated business may be considering forming a legal entity. We’re in favor of this decision, especially since incorporated businesses are able to establish credibility quickly with consumers.

However, many entrepreneurs may feel confused when it comes to business formation. Limited liability company or corporation? Partnership or a sole proprietorship? S Corporation or a B Corporation? Which is the best choice? Which entity types are the best fit for Main Street businesses? Read on for the answers!

Related: Incorporate Your Business Through StartupNation

Limited Liability Company (LLC)

What’s an LLC?

Forming a limited liability company (LLC) turns the owner of the business into a member. This means you, the business owner, has membership interest. An LLC also provides its business owners (members) with liability protection. This kind of protection creates a separation between professional and personal assets.

Let’s say that something unforeseen (and a bit negative, like lawsuit paperwork or business debts) impacts the company. Personal assets, like your car or home, would not be affected since you formed an LLC and have liability protection in place.

Why incorporate as an LLC?

There’s a great deal of flexibility involved with LLC formation, ranging from taxes to number of members. The entity itself is much more flexible to run and operate than other entities with more structured formations, such as corporations.

When you form an LLC, you may also choose how you would like to be taxed. This is because LLCs still don’t have their own specific tax category. Depending on the number of members, the IRS will tax an LLC as a sole proprietorship or partnership. However, an LLC may elect a different entity for tax purposes.

Many entrepreneurs who form an LLC choose to be taxed as an S Corporation. An S Corp election allows an LLC to avoid double taxation. Instead, profits, losses, deductions and credits may “pass through” the entity level. This means they go directly to the members instead of the entity. Another benefit to forming an LLC is determining its management structure.

An LLC may also be formed as one of these three member-specific structures:

  • Single member LLC: This is an LLC that only has one member. Since there is only one member of the entity, a single member LLC must maintain proof that the business is operated like an LLC and treated like a separate entity.
  • Member managed LLC: Each member manages the LLC together. They share the same amount of responsibility for the LLC’s operations and are treated as equals.
  • Manager managed LLC: A board of managers runs the LLC instead of its members. This specific LLC is often chosen if members don’t feel comfortable running the business on their own.

Related: Main Street Entrepreneurship is Thriving: Here’s Why

General Partnership

What’s a general partnership?

Want to go into business with a family member or friend? If so, you may choose to incorporate you Main Street business as a general partnership. This is the most simplified partnership formation option, with others including joint venture, silent and limited liability partnerships (LLP). Forming a partnership means establishing an agreement with your partner to equally share duties and profits. Partners in a partnership must also make all decisions together and mutually agree upon the outcome.

Why incorporate as a general partnership?

As mentioned above, entrepreneurs who go into business together form a general partnership so they are treated as partners. It is advised that these same partners also draft a written partnership agreement.

A written partnership agreement helps lay out the terms and conditions of the partnership. Some of these items may include more details about each partner’s role and responsibilities. Additionally, this agreement should outline terms for admitting new partners and guidelines for partner exits and terminations. It’s not a state requirement for a general partnership to have a written partnership agreement, but it is helpful to ensure the company is run properly.

B Corporation

What’s a B Corporation?

Some small Main Street businesses choose to provide offerings and services that make their company the best business for the world. Not in the world — for the world.

Forming a certified B Corporation allows for just that. A B Corp is a hybrid between a corporation and nonprofit. It’s a for-profit entity, but one that also commits to meeting social and environmental performance and accountability standards.

Why incorporate as a B Corporation?

Many entrepreneurs choose to incorporate as B Corps as a way to use business as a force for good. However, forming a B Corp requires fulfilling a few more steps beyond just filing an application and paying a filing fee. If you feel ready to meet these higher standards, your B Corp must become a Certified B Corporation.

How does this process work, exactly? First, your business must take the B Impact Assessment test. This is a free test, and within 30 minutes, you’ll receive a snapshot of how your can build a better business. Once you have the answers, you can see  the areas in which your business excels, along with any places where you need improvement. A customized plan from B Lab will help improve upon the weak spots, as needed.

Businesses that score high enough on the assessment right off the bat meet with a member of the B Lab staff. This virtual meeting helps assess your scores. If requested, you may need to provide extra documentation detailing how your company will commit to the public benefit.

At this point, you’re almost a Certified B Corporation! Remember that your B Corp must meet certain legal requirements with the state before it is fully certified. For some B Corps, this may include adopting a benefit corporation status with the state or amending governing documents. After these items have been taken care of, sign the B Corp Declaration of Interdependence and your B Corp agreement and pay the annual certification fee. Your Main Street storefront is now a Certified B Corporation!

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Incorporating on Main Street

Incorporating your business is nowhere near as intimidating nor time consuming as some make it out to be. No matter which legal entity you choose to incorporate your business as, your business will reap many benefits, such as protecting your personal assets, establishing credibility and more.

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