The Buying Process

How Should I Structure My New Company?

Unless a buyer desires to own his newly purchased company as an individual with little or no legal protections, he must choose and “entity” to hold the assets of the purchase. 

The most often asked question is “what entity should I use?”

The first and best answer is to ask your accountant or legal counsel. 

The choices most popular are a Corporation (“C”), a Corporation with an “S” class election, an LLC, or a Partnership.  Books have been written to outline the distinctions and advantages of all the options.  Of course depending on the size and scope of the business, some restrictions also apply which is why you should ask for professional assistance.  Your Business Broker can offer some suggestions, but remember the Broker is not qualified to provide legal advice.  Somewhere in the documents you sign with your Broker, there will be a paragraph that exempts your Broker from liability for this type of advice. 

Two of the most common entities for Main Street businesses are the “S” corporation classification and the LLC which has gained popularity over the last decade or so. 

Both of the above have good advantages, are inexpensive to form, and require a minimum of effort to maintain.  Since the LLC is a new entity form (legally new as within the last decade), the rules, requirements, and protections can vary from State to State.  If your business is limited to the State in which it is located, this may not be a problem.  LLC’s also require the least amount of work to maintain.  There are no stock certificates, no annual meeting requirements, and no board meeting requirements.  An LLC must have an operating agreement but there are no restrictions on the number of members or managers. 

In our experience over the past two to three years, a majority of our clients have elected to form an LLC (Limited Liability Company) to own the assets when they purchase a business. 

Make this decision early in the process and complete the paperwork and filing.  Waiting until the day before closing will cause a delay in the whole process.  You will need a Federal EIN (Employee Identification Number), and a bank account for your new entity prior to the close of escrow. 

Have any questions?  Give us a call and we will try to be of assistance.