Start your business the right way. With so many lawsuits these days, small businesses that do not properly structure their business risk legal and tax problems later. Speak with LegalDesq today about how to best structure your business.
Types of Business Structures
Limited Liability Company (LLC)
LLC are new business entities. While not as old as corporations and partnerships, they have certain advantages. The number one advantage that an LLC has over a partnership is that, like the owners or shareholders of a civil law corporation, the liability of the owners (or members) of an LLC for debts and obligations of the LLC is restricted to their financial investment. But like a general partnership, LLC members can participate in managing the business entity, unless the LLC’s articles of organization and operating agreement state that the LLC should be managed by managers.
A corporation is a business entity created under state civil law. It is a completely separate legal entity owned by shareholders. For federal income tax purposes, a corporation is typically a C corporation if it is taxed annually on their earnings – unless it elects to be taxed under Subchapter S. A C corporation is viewed as a separate taxpaying entity. A corporation conducts business, has net income or loss, pays taxes and hands out profits to shareholders. A coporation’s profit is taxed to the corporation when it is earned, and then it is taxed to the shareholders when administered as dividends. This in turn creates a double tax. The corporation does not get a tax deduction when it allocates dividends to shareholders. Shareholders cannot deduct any loss of the corporation.
S corporations are corporations that decide to pass along corporate income, deductions, losses, and credits to their shareholders for federal tax purposes. Shareholders of S corporations record and report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This lets S corporations avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.
A partnership is defined as a single business where two or more people retain ownership. Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business. Since partnerships require more than one person in the decision-making process, it’s important to talk about wide range of issues initially, and develop a legal partnership agreement. This agreement should document and state how future business decisions will be made, including how the partners will divide profits, resolve disagreements, change ownership (bring in new partners or buy out current partners) and how to end or dissolve the partnership. Although partnership agreements are not legally necessary, they are strongly recommended; it is considered very risky to operate a partnership without an agreement.
A sole proprietor is someone who owns and runs an unincorporated business by him or herself. A sole proprietorship is the simplest and most commonly seen structure selected to start a business. It is an unincorporated business owned and operated by one person. This creates no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s liabilities, losses, and debts owed.