Deciding on a legal form of business can be one of the hardest important decisions a potential business owner has to make. Which of the many legal structures is right depends on the type of business you plan to run. There are in essence 5 options available.
1. Sole Proprietor
2. Partnership
3. S. Corporation
4. C. Corporation
5. LLC
Information specific to each option can be researched once a final decision is made, but here are some pointers that can help narrow down the right choice for your business.
1. Risks and Liabilities - In large part, the best ownership structure for business depends on the type of services or products it will provide. If the business will engage in risky activities, a business entity that provides personal liability protection ("limited liability") may be best. These options shield personal assets from business debts and claims.
2. Formalities and Expenses - Sole proprietorships and partnerships are easy to set up. No special forms need to be filed or special fees need to be paid to start the business. Plus, there are no special operating rules. These legal structures still have forms, fees, and rules, but they are almost always less expensive and less difficult to maintain than LLCs and corporations.
3. Income Taxes - Owners of sole proprietorships, partnerships and LLCs all pay taxes on business profits in the same way. These three business types are “pass-through" tax entities, which means that all of the profits and losses pass through the business to the owners, who report their share of the profits (or deduct their share of the losses) on their personal income tax returns. Owners of these unincorporated businesses must pay income taxes on all net profits of the business, regardless of how much they actually take out of the business each year. In contrast, the owners of a corporation do not report their shares of corporate profits on their personal tax returns. The owners pay taxes only on profits they actually receive in the form of salaries, bonuses and dividends. This separate level of taxation adds a layer of complexity to filing and paying taxes, but it can be a benefit to some businesses.
4. Investment Needs - Unlike other business forms, the corporate structure allows a business to sell ownership shares in the company through its stock offerings. This makes it easier to attract investment capital and to hire and retain key employees by issuing employee stock options. It is important to note that other business entities are open to investors, but the number of investors can be limited by law. Be sure you understand what limits apply to your business before finalizing your legal structure.
For more information on choosing a business structure, contact florence@florencehardylaw.com to get a detailed analysis for your situation.
*The information in this post is not intended as legal advice and all readers should personally consult with an attorney before making a decision regarding legal structure.
**Article based on information offered through the Small Business Development Center.
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