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Family, Incorporated: Choosing a Small Business Structure

Whether you are new to business, recreating an old business, or venturing out into the world of hobby-turned-business, one of the first decisions you will make is what type of entity to create. When your business is a small one, it may seem a no-brainer to choose a sole proprietorship or LLC. But if you are choosing an LLC simply for liability protection or simplified taxes, you might want to keep thinking.


Similarities and differences between a close corporation and an LLC for small businesses in Kansas


Choosing the right business entity type is one of the most important decisions you will make. Two popular options are a close corporation and a limited liability company (LLC). (A close corporation has a limited number of shareholders and is not publicly traded. You are "keeping it close" or closed to others.) Both entity types offer certain advantages, but there are also some key differences between the two.


Similarities

  • Limited liability protection: Both close corporations and LLCs offer limited liability protection to their owners. This means that the owners' personal assets are largely protected from business debts and liabilities--subject to some exceptions. The more you follow the rules and keep business and personal finances and activities separate, generally the more protection you have. A close corporation's rules, when followed, may increase the level of protection.

  • Registration and reporting requirements: Both entity types must be registered with the Kansas Secretary of State and file annual reports to stay in business. For a close corporation, that includes reporting who the directors and officers are. For an LLC, it includes who owns a large stake in the business. All of this information is public.

  • Taxation: Both entity types can elect to be taxed as S-corporations, meaning they elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. This is not the default setting for either one, however.

Differences

  • Ownership structure: A close corporation is owned by a small group of shareholders--no more than 35 in Kansas. An LLC can have any number of members, from one to an unlimited number.

  • Management: A close corporation is typically managed by a board of directors, who are elected by the shareholders. (However, a close corporation can elect in its articles of incorporation to specify that the shareholders manage the organization instead of a board of directors, often eliminating the need for formal director meetings.) An LLC can be managed by its members, or it can have a manager who is not a member.

  • Formalities: A close corporation is subject to more formalities than an LLC. For example, close corporations must hold regular shareholder meetings and keep minutes of those meetings. LLCs may, but are not required to hold regular member meetings, and they are not required to keep minutes of their meetings.

  • Transferability of ownership interests: The ownership interests in a close corporation are typically restricted, meaning that they cannot be easily transferred to other people. The ownership interests in an LLC are typically freely transferable, meaning that they can be easily transferred to other people without the consent of the other members. However, in both types, additional guidelines on transfer of shares can be delineated in a written agreement.

Which entity type is right for your small business in Kansas?


The best entity type for your small business will depend on your specific needs and circumstances. If you are planning on having a small group of owners and you want to restrict the transferability of ownership interests, then a close corporation may be a good option for you. You may also want this type if you need more detailed accounting and do not want to pass through your personal return, or if you want increased liability protection. If you are planning on having a large number of owners, sole proprietor or partnership, or you want to have the flexibility to easily transfer ownership interests, then an LLC may be a better option for you. There may be additional flexibility in managing an LLC and more ways to contract around the default legal requirements.


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It is important to consult with an attorney (and probably with your accountant!) to determine which entity type is right for your specific situation. An attorney can help you understand the advantages and disadvantages of each entity type and can help you choose the entity type that is best suited for your needs.


Please note that this blog post is for informational purposes only and does not constitute legal advice. If you do want legal advice, you are welcome to set up a consultation at this link to see if we might be a fit for your needs.

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