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Which Business Entity Is Best For You?

If you’re looking to form a New Mexico business, before you can decide which business form is right for you and your circumstances, you need to learn about your options. The following is a short summary of the most common business entity forms:

  • sole proprietorship
  • partnership
  • limited partnership
  • limited liability company (LLC)
  • for-profit corporation
  • nonprofit corporation
  • cooperative

Choosing Right Business EntitySole Proprietorship

A sole proprietorship is a good option for many new businesses which have a single owner. A sole proprietorship is a business comprised of one person, which is not required to register with its secretary of state’s office or file any particular paperwork. A sole proprietorship is formed simply by a person going into business, as opposed to a LLC or corporation which exist only after the filing of certain forms.

Legally speaking, a sole proprietorship and its owner are the same entity, and are not separated for purposes of liability or taxation. The business owner is obligated to report his or her income and losses from the business on their personal tax return each year, and is then held personally responsible for any tax owed, as well as judgments and debts against the business.

Partnership

A partnership is somewhat similar to a sole proprietorship in that the filing on certain paperwork is not essential to formation. Rather, a partnership forms at the moment two or more people agree to enter into business with one another and share the profits from said business, whether they intend to form a partnership or not. Also similar to a sole proprietorship, a partnership’s owners will be made to pay tax only on their personal share of the business’s income, on their individual tax return. Also, each partner will be held personally liable for any debts of or claims against the partnership.

Both a sole proprietorship and a partnership are logical choices to people for whom liability is a primary concern. For example, if you are operating a small business where the possibility of being sued is very small, and where you are not likely to be incurring debt, either a sole proprietorship or a partnership may be appropriate for you. Business owners have options however due to the inexpensive cost and relative ease of forming a business entity.

Limited Partnership

Unlike “regular” partnerships, limited partnerships can be expensive and complicated to form and maintain, and the average business owner is discouraged from forming one. When a limited partnership is created, it is usually created by a single person or company, referred to as the “general partner,” who then attempts to procure investments from other parties, who will be known as the “limited partners” upon investing in the business.

In this business form, a general partner will control the business’s everyday operations, and will be held individually liable for any debts of the business. A limited partner on the other hand will have little limited control over everyday business operations, and will not be regarded as personally liable for claims against or debts incurred by the business.

New Mexico Corporation or an LLC

Though forming and operating as a limited liability company or a corporation can be more expensive or complicated than other business entities, it is usually worth the added cost and effort to many small business owners. The primary benefit of forming an LLC or a corporation is that both business entities place limits on the personal liability of the business owner’s for the business’s debts

With regard to corporations, they differ from other business forms in that they are regarded as independent entities for tax purposes- meaning the owners of the business won’t be on the hook personally for taxes or debts owed by the business. Because of this, the owner of a corporation does not use his or her individual tax return to pay any of the tax owed by the corporation itself. Instead, the corporation pays the taxes on corporate profits, and the business owners pay tax only on the income they receive from the corporation either through wages or through a dividend.

LLCs also offer limited liability to business owners when it comes to business claims and debts. However, with respect to taxation, LLCs are more closely comparable to partnerships in that the business owners pay tax on their personal share of the business income on their personal tax returns. LLCs and corporations are a logical choice for business owners who either face a risk of being sued because of the business or racking up considerable business debt, or want to protect their personal assets from creditors of the business.

Nonprofit Corporation

A nonprofit corporation is a business formed in order to carry out a charitable purpose, whether it be educational, scientific, literary, or religious. These corporations can raise funding by securing grant funding, both public and private, or donations from companies or individuals. These corporations are generally not taxed on a federal or state level, at least not on money the corporation takes in which is related to its nonprofit purpose. Our New Mexico business attorneys are available for questions that you may have about forming your new business.

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