Three Popular Entities and How to Structure Them
Some of the most frequent questions that I receive from clients revolve around entity selection for conducting different types of businesses. One aspect of that involves governance and authority. The issue of governance and authority is important because it determines who has the legal authority to bind the company to contracts and to act on behalf of the company.
The three most popular types of entities are corporations, limited liability companies, and limited partnerships. There are others, however, that might be better suited to your needs.
Corporations have a three-tier structure:
Under Nevada law, a corporation must have at least one director and the following three officer positions: (1) president, (2) secretary, and (3) treasurer.
- shareholders, who are the owners;
- the board of directors, who are elected by the shareholders and oversee the overall direction of the company; and
- the officers, who are appointed by the board of directors and manage the day-to-day affairs of the company.
Limited Liability Companies
Limited liability companies can be either manager-managed or member-managed.
Members are the owners of the company, much like shareholders in a corporation.
Managers may be members or not.
As to multiple-member companies, I generally recommend that the LLC be manager-managed for the following reasons, among others:
- Additional members can be added in the future without changing management;
- Members' interests can be held in trusts for estate planning purposes; and
- If desired, a corporation could be established as the manager of the company for tax and liability reasons.
Limited partnerships must have at least one general partner and at least one limited partner. The general partners and the limited partners are owners in the limited partnership.
Limited partnerships have fallen somewhat out of favor because the general partner has unlimited personal liability. Therefore, in order to have the most asset protection in a limited partnership, it is recommended that a separate entity (typically, a corporation) be formed to hold the general partnership interest.
There are many other tax considerations and operational considerations when choosing an entity, however, understanding the basic framework may help you decide which form of entity would best suit your business needs. Please remember that tax election with the IRS is a different issue than entity selection under state law.
Ms. Drury is a Shareholder in the firm of Marquis Aurbach Coffing in Las Vegas, Nevada, and is chairperson of their transactional department. Drury was named a Leader in the Field of Real Estate for 2011 and was also named by Best Lawyers in America in the specialties of Corporate Law and Real Estate Law for 2011. Ms. Drury's practice focuses on transactions, with an emphasis in real estate. She documents and oversees entity formation, land and business acquisition, construction agreements, loans (construction and permanent), general operational and contract needs, and the ultimate sale of land or improved properties and businesses. Ms. Drury serves on the Executive Committees of the State Bar of Nevada's Real Property Law Section and Business Law Section, which, among other things, draft statutes for consideration and adoption by the legislature of the State of Nevada. Prior to joining Marquis & Aurbach, Ms. Drury served as Associate General Counsel at Station Casinos, Inc. Ms. Drury has a Bachelor of Arts in International Relations and Print Journalism from the University of Southern California, with a minor in Business Administration. She has a Juris Doctor Degree from the University of California, Hastings College of the Law.