Many people operate their business as a sole proprietorship because it is simple. The business owner can use his or her own name and treat the business income as personal income. Unfortunately, this leaves the business owner open to unlimited personal liability for payment of the business’s debts and any other claims against the business. New Hampshire law provides a number of options for business owners to reduce the risk of personal liability. By forming a separate entity for the business, the business operator can be shielded from personal liability on the business’s debts (unless a personal guarantee is made) and can receive protection from claims that are made against the business due to an employee’s or co-owner’s wrongdoing. It should be noted, however, that the business owner will remain personally liable for any wrongdoing that he or she commits, regardless of whether an entity has been formed.
One common business entity is the limited liability company, or LLC. LLCs limit its member’s liability to his or her investment in the business, unless one of a few exceptions applies. Additionally, the LLC allows the business’s profits and losses to “pass through” to its members, so they retain the ability to claim the business income and expenses personally and avoid double taxation. There is no requirement for LLCs to hold meetings or keep minutes, though submission of an annual fee and report to the New Hampshire Secretary of State is required. There are some drawbacks to an LLC. For example, there can be restrictions on transferring your membership interest, and shares cannot be issued to employees as part of employment compensation.
Another option for business owners who are looking to limit their liability, but still want to avoid double taxation, is the subchapter S corporation. Because a corporation is a completely separate entity from its shareholders, this entity provides personal protection from the business’s debts and liabilities. A benefit to the subchapter S corporation is that ownership interests in the business can be transferred without terminating the entity. In addition to submitting an annual report and fee to the N.H. Secretary of State, subchapter S corporations do have other requirements that must be met in order to maintain their status, such as holding regular meetings and keeping minutes.
There are other entity options to consider (i.e. partnerships and limited partnerships), depending on your individual needs. No matter which entity you chose, it is important that you follow the formation and annual reporting requirements. The attorneys at Kalil & LaCount are here to assist you with ensuring that your business entity is formed and maintained correctly. Our attorneys have experience forming many different types of business entities and will work with you to determine which form will best meet your needs.