When launching your own business, one of the first decisions you will need to make is what type of entity to form. Which entity you choose will influence how much personal liability you assume, how you will be taxed, how you are obligated to compensate your employees, and more. As such, taking the time to think through the best option for your business is a vital step you should never skip.

Here, we share an overview of the five most common entity structures. However, while this is meant to give you a basic primer on the entity types, you should ideally consult an experienced business planning attorney before making a final decision and filing your corporate paperwork. An attorney can help you ensure you are priming your business for success while putting the proper legal safeguards in place. 

The Five Most Common Entity Types

If your business is fairly typical, it will most likely take one of these five legal entity forms: a sole proprietorship, a limited liability company (LLC), a partnership, a C corporation, or an S corporation. 

#1: The Sole Proprietorship

A sole proprietorship is the entity type that offers the most administrative ease: there is no formal legal structure, but rather, one person owns and controls the business. To form a sole proprietorship, the business owner need not file any official paperwork with the Secretary of State’s office. This is because from a legal and a taxation perspective, the individual and the business are deemed one and the same. Practically, then, the business owner of a sole proprietorship is personally responsible for all of the business’s debts, losses, and liabilities. Additionally, the owner pays all taxes and reports profits and losses on Schedule C of his income tax return – there is no separate corporate entity filing.

While this is certainly the simplest way to run a business from an administrative perspective, there are clear drawbacks, namely, the lack of liability limitation. Since the business owner and the entity are deemed the same, any legal action leveled at the business will attach to the individual as well. This means that any judgment creditors of the business can come after the individual owner’s personal assets. 

Business owners certainly have a compelling interest in separating themselves from their entities to preserve a liability shield. This is where the LLC comes into play.

#2. The Limited Liability Company (LLC)

An LLC is considered a hybrid entity because it has features of both a partnership and a corporation. LLCs are owned by one or more people or entities, known as “members.”

Like a corporation (and unlike a sole proprietorship), LLCs offer personal liability protection for its members. The business is a formal legal structure with a separate identity from that of its members, so with a few exceptions, creditors of the business cannot attach a judgment to the owner’s personal assets. LLCs also provide flexibility when it comes to taxes, as members can choose whether they are taxed as a corporation or as individuals. As with any entity, taxes can get complicated with an LLC, so it is best to consult a small business attorney when forming one and selecting your tax treatment. 

#3: The Partnership

A partnership is a slightly rarer entity – the majority of small businesses are run as sole proprietorships or LLCs. A partnership consists of two or more individuals who own and control a business. It is similar to a sole proprietorship, except that profits, debts, and liabilities are shared among partners instead of borne by the sole proprietor alone. Each partner files his own taxes for their share of the profits and separately report their losses.

There are two types of partnerships: general and limited. In a general partnership, partners share all profits and liabilities equally. Conversely, in a limited partnership, some partners have a limited share of the profits and a limited share of the liability, depending on how ownership is allocated among the partners. 

#4: The C Corporation

A C corporation is a common entity form for larger businesses with employees. Like an LLC, it is considered a separate legal “person” from its owners. A C corporation (often just called a corporation) is owned by its shareholders and run by a board of directors and management. 

Because a C corporation is a separate legal entity, the entity, not the owners, is responsible for the business’s debts and liabilities. Likewise, a C corporation is taxed separately from its owners. Additionally, C corporations are subject to “double taxation,” meaning that revenue is taxed both when it is earned and when it is distributed to shareholders. This is why many smaller businesses form as LLCs, which have the option of single taxation (at the revenue level only). 

#5: The S Corporation

The second type of corporation is called an S corporation. To become an S corporation, an entity must always form as a C corporation and then apply to become an S corporation. S corporations also provide limited liability protection to shareholders and are run by a board of directors and management. 

The main difference between the two types of corporations is that S corporations pass their income, losses, deductions, and credits on to their shareholders, who then file this information on their personal income taxes. The corporation, therefore, does not pay its own federal income taxes. 

Important Questions to Ask Before Selecting an Entity Type

Every business entity is unique, but there are some key questions to ask yourself (or your attorney) when deciding on your business entity. These include: 

Will you run the business alone or with someone else? 

If you are starting a business alone, you can choose any of the above entities except a partnership, which requires two or more partners to form. If you are starting the business with at least one other person, you can choose any of the entities except the sole proprietorship. Do you want to limit your personal liability?

Depending on which entity structure you choose, if your business cannot pay its debts, your personal assets as the owner could be at risk. You may want to consider forming an entity with limited liability protection, such as an LLC or C corporation. Sole proprietorships and general partnerships do not offer limited liability protection. 

Can you keep up with the administrative requirements?

When you own a business, you are obligated to make various filings with your state’s Secretary of State’s office, depending on your entity type. If you are looking for simplicity, a sole proprietorship tends to be the most manageable entity to form and run. However, your business needs might be better suited for a more formal legal structure, such as a C corporation, which requires appointing directors and officers and filing documents with the state. Consult your attorney to determine the filing and administrative requirements that accompany each entity type before making your final decision. 

Which Entity Should You Choose?

Every small business is different, and each entity type offers pros and cons. At Wilson Ratledge, we help people every day to determine how to best set up their new venture, and hope this article has helped you feel well-equipped to discuss these options with an attorney and be well on your way to establishing your small business entity. 

As we move deeper into the 2000s, “smart” devices are only getting smarter. From phones to homes, vehicles, and fitness devices, we are surrounded by a veritable web of constantly engaged devices. While a decade ago, these devices simply provided us with new levels of convenience, now, they can do even more: they can connect and “talk” with each other, unlocking entirely new levels of efficiency. Consumers and businesses alike rely on this connectivity for convenience, accessibility, and automation across platforms.

Enter: the “Internet of Things (IoT),” a virtual web of the devices that connect and communicate with each other via the Internet. From data storage and retrieval methods to remote workspace management and corporate process improvement, the IoT increases efficiency in all aspects of life. 

Understandably, this can all seem extremely vague. What, exactly, is the IoT? Who (other than maybe Al Gore) invented it? Is it safe? And who, if anyone, regulates it? In the paragraphs that follow, we provide a basic overview of the IoT, from what it does, to who regulates it and the legal issues it can generate.

What, Exactly, Is the IoT?

While it seems like a nebulous concept, the IoT is nothing other than a network of devices that are equipped to exchange data. Once upon a time, the IoT was limited to computers, fax machines, and eventually cell phones. But now, kitchen appliances, cars, light fixtures, thermostats, cameras, and televisions can communicate through the Internet.

Current estimates suggest that the IoT is made up of more than seven billion devices. However, with new devices introduced to the market constantly, the IoT is expected to grow by more than twenty billion in just five years. Several companies, like Amazon and Google, have developed hubs for consumers to manage and control all their connected devices in one place. 

For consumers, cell phones are the most common access point to the IoT. Currently, the IoT is the avenue by which smartphones connect and provide remote access to the Internet, household appliances, personal computers, vehicles, and more. 

Other examples of how consumers interact with the IoT are:

• Vehicle-to-vehicle communication 
• Municipal grids designed to increase energy efficiency and reduce waste
• Insurance companies seeking to record location and operation data in real-time
• Smart home connectivity
• The use of health and fitness devices
• Cloud storage methods like the G-suite and Dropbox

Legal Concerns 

The IoT presents legal risks, however. With this level of connectivity, privacy, data security, and intellectual property concerns are inevitable. Such an extensive and ever-expanding web of devices will likely generate unforeseen legal issues in the coming years and decades. Currently, however, some of the most common legal issues are:

Security Breaches

The IoT allows data to be shared with minimal human interaction (a convenience factor, especially in the corporate context). However, because these devices are almost constantly switched “on,” there are risks associated with recording sensitive personal information, security breaches, data scraping, and hacking. 

Issues for Manufacturers

The creators of devices that work within the IoT can face liability if the devices lack adequate safety measures, most especially, data security capabilities. 

Intellectual Property (IP) Disputes

When data is freely shared and exchanged, issues of ownership can become murky. In many cases, companies may struggle to claim ownership over information that is shared across devices and platforms.  

Antitrust Violations

Should information be shared between competitors to create market power or other illegal market conduct, an aggrieved party can raise an antitrust violation claim.

Who Regulates the IoT?

The issue of regulation can be murky. Generally, the IoT sees minimal government regulation, as the FTC has declined to issue overarching guidance on its use. Some international laws, like the European General Data Protection Regulation (GDPR) and the ePrivacy regulation, impact the IoT by speaking to data privacy and the protection of personal information. Additionally, the FCC does regulate the Internet and issues recommendations for companies that provide home, wearable, or other personal devices. However, the agency asks device manufacturers to incorporate security features into their designs. 

However, even the best security is not risk-free. Privacy and cybersecurity concerns, particularly data breaches and intellectual property (IP) issues, continue to plague the IoT. Rather than relying on built-in safety tools and user settings, businesses and consumers must incorporate additional safety measures to ensure their information is secure and their devices are safe. 

The Significance of the IoT

The IoT is not just making consumer lives easier by connecting every device they need with remote access in one place. Industries from healthcare to manufacturing rely on the IoT for improving efficiency for better productivity. And while there are risks inherent in having so much technology connected as it is through the IoT, the continued advancements, economic benefits, and reduced need for human involvement provided by the IoT connections are saving companies money, increasing efficiency, and improving quality of life.

Nonetheless, the IoT is still new terrain and as such, there are still numerous unresolved issues regarding its use and regulation. In all cases, consumers and businesses alike should take caution in choosing to share or disseminate sensitive information.

At Wilson Ratledge, we assist business founders in taking steps that keep their businesses – and their personal assets – safe. In our digital age, this inevitably includes the Internet of Things. We help our clients in setting up appropriate legal protections for the IP they develop and help structure their businesses to address potential pitfalls down the road. For assistance or to learn more, contact one of our experienced North Carolina business attorneys today at 919-980-4082 or via our contact form below. 

As a business owner, one of the key considerations in selecting a specific business entity is how much liability you are willing to take on. Corporations are viewed as individuals under liability laws, which generally means that you, the business owner, are not personally liable for the debts or legal obligations of your business. 

Nonetheless, exceptions apply. In some situations, a business owner can be held personally liable for business debts or other obligations that would ordinarily fall within the business’ responsibilities. Through a process known in legalese as “piercing the corporate veil,” a creditor or individual may sue the business owner personally for the transgressions of the business. This would expose your personal assets, like your home, your vehicle, and your bank accounts to a civil judgment. 

So, how is the corporate veil pierced and what can you do to protect yourself and your business?  Here, we discuss the basics you need to know about the liability shield known as the corporate veil and how to strengthen it to protect yourself and your assets from personal liability. 

What is the “corporate veil?”

The “corporate veil” is a term used to refer to the liability shield established when a corporate entity is created. By operating as a corporation rather than a sole proprietorship, the business owner is generally shielded from personal liability for actions or debts of the business. Should a creditor or individual harmed by the business file suit for the debt or injury, only the business and business assets would be at risk. The business owner and his or her personal assets are protected from liability. 

In other words, the corporate veil separates the business and the business owner, ensuring both are treated as separate legal entities.      

How is the corporate veil pierced?

If the court determines there is an insufficient separation between the business and business owner for the two entities to be treated independently, a creditor or individual can file a legal action to “pierce” the corporate veil, that is, sue the business owner personally for one of the business’ transgressions. Upon piercing the corporate veil, the legal protections previously afforded to the business owner through the creation of the entity disappears, exposing his or her personal property to a civil judgment.

To pierce the corporate veil, the creditor or injured party must prove that the business was not functioning as a separate entity and that the lines between the business and its owner were blurred. This is often called the “alter ego” theory; that is, the business was operating as an alter ego of the business owner himself. In these cases, creditors can attempt to hold the business owner responsible for the debt or injury. In North Carolina, the creditor or injured party seeking to hold the business owner liable by piercing the corporate veil must prove that the business owner had so much control over the business that the business did not have a “separate mind, will, or existence of its own.”

As in most states, North Carolina law generally does not favor the practice of piercing the corporate veil and trumping the liability protection afforded to business owners. Therefore, the individual seeking to hold the business owner personally liable must allege and prove serious misconduct to overcome the liability protection. 

Courts examine several factors in discerning whether a company truly has established an independent existence from its owners. Some of these factors include:

• Whether the company was adequately capitalized;
• Whether the company’s directors, shareholders, officers, members, or managers compiled with corporate formalities in running the business;
• Whether the company was solvent; 
• Whether the company was fragmented into multiple “shell” entities;
• Whether the individual owner at issue siphoned funds from the company to pay his or her personal expenses or debts; and
• Whether the company maintained proper corporate records.

Can I avoid personal liability?

The simplest way to maintain the protection of your liability shield is to make sure that your business operates in a fair, honest, and accurate manner following applicable rules and complying with business standards. 

Your attorney can advise you on how to do so. However, generally, business owners seeking to maintain substantial liability protection tend to do the following:

• They do not commingle finances. They keep business accounts and personal accounts separate. They do not use corporate accounts or other business funds to pay personal expenses. 
• They follow the rules. Corporations must create and comply with bylaws, pay corporate taxes, and satisfy meeting requirements. There are strict formalities that corporations must follow, and LLCs are advised to comply with the same requirements. 
• They maintain proper records. Business decisions and meetings should be documented, and the records should be kept for at least seven years. Businesses that maintain a strong liability shield ensure minutes are recorded for significant meetings such as board meetings and shareholder meetings. All their records are accurate, consistent, and stored in a secure location.
• The adequately fund the business. You need money to start a business. Whether you use your own money, have investors, or obtain a business loan, you must have adequate funds to purchase the equipment and inventory you need to open the business and maintain operations. 
• They properly convey their business status. Whether you are a corporation or LLC, make sure that your business status is apparent, and you do not present yourself as a sole proprietor. Invoices, contracts, business cards, and other business-related documents should address the business as an entity separate and apart from you and your assets.

An experienced business attorney can assist you with structuring your business and managing business transactions to protect you from personal liability. Whether you need assistance getting your business started or have questions about your liability based on current practices, our team has the knowledge and advice you need to operate a successful business with a strong veil to shield you from personal liability.

Whether you are young and in perfect health or aging with health concerns, estate planning is necessary. An estate plan allows you to decide who will manage your estate after you die or if you become incapacitated. Through an estate plan, you not only name the person responsible for making sure your wishes are honored, but an effective estate plan also details your preferences for everything from healthcare to finances and property distribution.

Estate planning can be complex and involves a lot of difficult decisions, so it is important to recruit an appropriate team of professionals to help you navigate the best options for your circumstances. An estate planning attorney and financial advisor or accountant are vital members of your estate planning team.  

How important is an estate plan? What components do you need? We address these and other frequently asked estate planning questions in the paragraphs that follow.

Do I need a will? What happens if I die without one?

Yes! If you care how your property is distributed, who will care for your minor children when you are unable to do so yourself, or if you just want to make sure your loved ones have the financial means to get by after you are gone, you need a will. A will allows you to transfer assets to beneficiaries, select guardians for minor children, and choose an executor to manage your estate upon your death. 

If you do not have a will, your assets will pass through the state-sanctioned intestacy scheme. This means state law will determine how your estate is distributed. Unfortunately, this means everything from your personal property to your children goes to whomever the state law determines is appropriate regardless of what you may desire. 

What are the benefits of proper estate planning?

Having an estate plan does more than just offer peace of mind that your assets will be distributed per your wishes. The taxes associated with settling an estate can be costly. An effective estate plan can reduce or eliminate estate taxes. Additionally, your estate plan can be used to protect your property now, upon your death, and long after you are gone in the event of post-mortem litigation against your estate or divorce.

A clear estate plan provides the guidance your loved ones need when you become incapacitated or die. Difficult decisions about life-sustaining measures or arguments about who should get a beloved family heirloom only add stress to an already emotional time. Proper estate planning removes the burden of settling your estate from your family.

What are the elements of an effective estate plan? 

Every estate plan looks different and varies in complexity based on the needs and assets of the individual. However, while there are many components of an effective estate plan, four main elements are found in all effective estate plans: the will, living will or advance directive, a power of attorney, and a trust.

• Your will protects your estate from the complications of probate or intestate distributions. 
• A living will or advance directive is also necessary because it allows you to make decisions about your medical care in the event you become incapacitated, terminally ill, or otherwise unable to communicate your desires. Your feelings about being placed on life support or receiving other life-sustaining medical interventions will not matter if you do not have an advance directive. Medical providers will make these decisions for you or your family will face the difficult burden of deciding what to do. 
• A power of attorney allows you to name the individual responsible for making decisions when you are unable to do so for yourself. 
• A trust protects the specific distribution of your assets, such as ensuring your child receives the benefits of your assets regularly throughout their life, all at once upon a certain life event like marriage, or other stipulations. Whether or not you need a trust depends on the size of your estate and/or the necessity for oversight in ensuring your heirs properly manage your assets upon your death such as minor children or elderly parents in need of long-term care. However, everyone needs a living will or advance directive and a power of attorney, regardless of the size of your estate or family situation.

How often do I need to update my will?

Generally, you should review your will and all components of your estate plan at least every three years to five years. However, any significant life event should also trigger a review of your estate plan. This includes events like marriage, divorce, a new child, or even a change in jobs or income. Failure to review and update your estate plan timely can lead to problems when intended heirs being unavailable, or due to other administrative flaws.

When is the best time to plan my estate?

Now. There is no such thing as creating an estate plan too early, but if you are waiting for some life event to do so, like a specific birth date or terminal diagnosis, that event could come after it is too late. You must be of sound mind to create a valid estate plan. 

How can an estate planning attorney help me?

The laws regarding estate planning are intricate and complicated, full of technicalities and nuances that make drafting an effective estate plan tricky. Can you write your own will and it be valid? Sure. However, a simple typographical error or missing signature could not only nullify the document’s validity, it could change the entire meaning of your document to directly contradict your intentions. 

An experienced attorney is not only skilled at applying the law to make sure your documents hold up in court should someone decide to challenge them, but can also make suggestions to address matters you might not otherwise think to plan for. 

At Wilson Ratledge, we assist our clients in setting up estate plans that give them the peace of mind in knowing that their assets and loved ones will be adequately protected. Contact one of our experienced North Carolina estate planning attorneys today at 919-787-7711 or via our contact form below.