Choosing the legal structure for your business is one of the most important business decisions you make. The choice of entity affects legal liability, taxation, and business operations. A limited liability company or LLC is a popular choice for new and growing businesses, but is an LLC the right choice for your business? The State of Kansas also allows other types of structures. It’s important to understand the differences among the structure types, as well as the advantages and disadvantages of an LLC before you decide whether you should form an LLC for your business.
Kansas laws govern all business structures in the state. The statutes allow several basic business entity types. When you establish a new business, or evaluate the legal structure of an existing structure, you make a choice among the available entity types.
Sole proprietorships are the most common form of business structure in Kansas. The business has one owner, who receives the business profits and takes the business losses. Business income and expenses are reported on the owner’s personal income tax return and taxed at the owner’s individual tax rate. The owner is personally liable for all debts and obligations of the business.
Kansas does not require a sole proprietorship to register or file the business name.
Kansas laws allow several types of partnership structures. All partnerships are governed by specific statutes. Generally, business income and losses are reported individually by the partnership owners (called partners) on their personal income tax returns. The partnership does not file a return or pay taxes. Each partner is personally liable for business liabilities, debts, and claims, except to the extent a partner is shielded in a limited liability partnership.
A general partnership is owned by two or more people, each of whom is responsible for debts and obligations of the business. Distribution of profits and losses, as well as allocation of management and other operational responsibilities, is usually defined in a written partnership agreement. State filings are optional, rather than mandatory.
A limited partnership has one or more general partners and one or more limited partners. The limited partners have no voice in management. Specific registration requirements apply to limited partnerships in Kansas.
A limited liability partnership is a type of legal structure in which a partner’s personal assets are protected from specific types of claims. A limited liability partnership must meet specific statutory requirements, including registration.
A corporation is the most complex type of legal business structure in Kansas. The corporation is a separate legal entity, which is responsible for the debts and obligations of the business. The corporation is also a separate taxable entity. Specific statutory requirements apply to formation, registration, and operation of corporations in Kansas.
A limited liability company or LLC is a business entity type that combines flexible management aspects of a general partnership with the limited liability of a corporation. Owners of an LLC are called members.
Each member’s liability is limited to their investment in the business. Specific statutes govern Kansas LLCs, and registration requirements apply.
LLCs are a popular choice for business legal structure for a number of reasons.
One of the primary advantages of an LLC is the limited personal liability of the members, which contrasts with liability in a sole proprietorship or partnership. Liability is one important reason that small businesses often choose the LLC structure.
By default, a Kansas LLC is taxed as a pass-through entity. The LLC itself does not report or pay taxes. Revenue is passed through to members, who report the income on their personal income tax return, in the same way as sole proprietors and partners.
Some LLCs qualify to choose to be taxed as an S corporation, which may result in tax savings for the business owners. For detailed information on S corporation taxation, please read our previous blog article, S Corporation vs LLC: Which Is Right for Your Business Formation?
An LLC is relatively simple to create and operate. While Kansas law does require filing an annual report, the administrative burdens are minimal. Unlike a corporation, management structures and meetings are not required.
An LLC provides ownership and management flexibility, as well as flexibility in profit distributions. The operating agreement of the LLC defines ownership and management roles, as well as how profits of the company are distributed.
Choosing an LLC has some disadvantages, including the fact that it may cost more to form and operate than a sole proprietorship or partnership. While an operating agreement is not required, having one is advisable, particularly for an LLC with more than one member. Kansas requires LLCs to maintain a resident agent and file annual reports, which are not required for some other entity types.
LLC ownership has limited liquidity, so transferring a member’s interest is difficult. From the perspective of potential investors, an LLC structure may not be attractive.
Whether you’re starting a new business or re-evaluating one that’s growing, the choice of legal entity for your venture is a decision that should receive considerable attention. While there is no requirement for using a lawyer to establish a business or change the legal structure, getting assistance from a knowledgeable business law attorney is the best way to ensure that you make the right decision for your circumstances and goals.
A business attorney helps you evaluate the advantages and disadvantages of the options for your business structure, so you can make an informed decision of how best to proceed for the present and future of your business and your personal life. Another advantage of getting help from a lawyer early on is that you can establish a working relationship with someone who understands your business and will be available to assist when legal issues arise in the future.
Our business law attorneys at Sloan Law Firm assist clients with all aspects of establishing and operating a business. From our offices in Topeka and Lawrence, we help businesses of all sizes and types throughout the State of Kansas. We invite you to call (785) 357-6311 to talk with us about your business concerns or contact us online to schedule a consultation.
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