Choose the Right Corporate Structure that Meets Your Business Needs.
Starting a business can be both exciting and daunting. Bringing to fruition your ideas, skills and hard work over the years gives you a feeling of fulfillment and empowerment. However, it is important to decide early in the process which corporate structure suits your new business since both legal and tax considerations will need to be pondered. The type of corporate structure you choose will determine, among other things: (1) which income tax return form you will have to file with the U.S. Internal Revenue Service (“IRS”) and other regulatory tax agencies, as applicable; (2) any corporate regulatory filing(s); (3) profits and losses; (4) potential personal liabilities; (5) corporate hierarchies and business policies and procedures; (6) whether your entity will offer stocks; (7) will you be allowed to do fundraising initiatives; and (8) many other intricacies.
The most common forms of business structures are sole proprietorships, partnerships, corporations and limited liability companies. Throughout this blog we will discuss basic pros and cons in order to give you a glimpse on what to start thinking about before making this important business decision.
Small Businesses and Self-Employment/Sole Proprietorship
“A sole proprietor is someone who owns an unincorporated business by himself or herself” (available at Internal Revenue Service, https://www.irs.gov/businesses/small-businesses-self-employed/sole-proprietorships (last visited June 8, 2022)). Therefore, if you start conducting business activities and do not register as any other type of business, you are considered a sole proprietor. There are certain advantages when doing business as a sole proprietor, for example: (1) it is a simple business structure both for creating and dissolving it; (2) limited license fees and business taxes, as applicable; and (3) potential tax deductions. However, a big drawback is the fact that you are personally liable for debts and obligations while conducting business and, because there is no separate business entity, your assets may be on the line if someone decides to sue you or if you default on your business obligations. Nonetheless, you may still use trade names to promote your business. Click here to read more on trademarks.
“A partnership is the relationship between two or more people to do trade or business. Each person contributes money, property, labor or skill, and shares in the profits and losses of the business” (available at Internal Revenue Service, https://www.irs.gov/businesses/partnerships (last visited June 8, 2022)). This type of business structure may be a good choice for multiple owners, professional groups and individuals who have close trustworthy relationships.
A corporation is a legal entity created, under the law of a state, separate and distinct from its owners. One important element is the fact that shareholders are not personally liable for a corporation’s liabilities, including but not limited to debt. Corporations include C corporations, S corporations, B corporations, close corporations and nonprofit corporations. Corporations sometimes have double taxation issues, which we will discuss in a subsequent blog along with detailing pros and cons of each type of corporation.
Limited Liability Companies (“LLCs”)
Limited Liability Companies’ rules and regulations vary from one state to another; however, they are a hybrid business structure that combines both corporation and partnership flexibilities. LLC owners are “members” rather than shareholders or partners and “[m]ost states do not restrict ownership, so members may include individuals, corporations, other LLCs and foreign entities” (available at Internal Revenue Service, https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc (last visited June 8, 2022)). However, depending on the amount and type of members, LLCs will be treated differently by the IRS (either as corporations, partnerships, or as sole proprietor/owners – defined by the IRS as a disregarded entity”).
These are just the basics on corporate structures and business formation. If you have any questions or require additional information, please contact our office. Stay tuned for our next blog on corporate structures, business formation and best practices!
Thank you for reading our blogs!