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You are starting up a new business. Congratulations. This is a very exciting time but it is also a time to make many decisions. This could possibly be a time when you will make more decisions at one time in the entire duration of your business. And one of those decisions will be the structure of your business.
There are several choices available to you and all have pros and cons to consider. You can choice from Sole Proprietorship, General Partnership, Joint Venture, Limited Partnership, Limited Liability Partnership or LLP, Limited Liability Company or LLC, Corporation, S Corporation, Not-For-Profit Corporation or a Professional Corporation. So what is the right structure for your business?
The first step is understanding what defines each of these business structures. A sole proprietorship is operated by a single person and that person is not considered an employee. It can be set up by an individual with little legal requirements and depending on the business may or may not require business licenses or permits. The owner reports the income or loss on their personal income tax return using a Schedule C.
A General Partnership requires at least two partners and should be defined by a legal partnership contract. Partners, like sole proprietors are not employees. Both personal and the partnership assets may be at risk. No separate income taxes are paid as income flows through the individual partner’s tax returns. Although a separate return (1065) must be filed. As with all business structures, certain permits and/or licenses may be required.
A Limited Partnership contains one or more general partners and one or more limited partners. A limited partner differs from a general partner in that they are only personally responsible up to the amount of capital they contributed to the business. They are also not directly involved in the management of the business.
A Limited Liability Company combines the advantages of a corporation and a partnership but maybe more complicated to set up. It also allows for a choice of how it will be taxed – as a partnership with income flowing through the individual partner’s returns or a corporation. Also non-U.S. citizens, resident aliens and other business entities can participate as partners. An unlimited number of partners are allowed and its owners are not usually held responsible for the entity’s debts.
A Corporation gives the participating owners some protections from the entity’s debts. Only one person needs to be a shareholder. This structure must be set up under the state law by filing documents. The corporation files and pays its own income taxes. Any income the corporation earns that is distributed to the shareholders is called a dividend and the shareholders must pay a tax in addition to what the corporation pay.
A S-Corp provides many of the same protections for its shareholders as a C-Corporation. However the income the S-Corporation earns flows through the individual shareholders returns with the business filing an informational return but not paying any taxes. This is true even if the business does not distribute any funds to the shareholders. The limit for shareholders is 100 individuals who are either U. S. citizens or Resident Aliens. There are no Social Security taxes due on the income flowing from the business to the individual shareholders
A Not-Profit Corporation is just what its name implies. This is a company formed for the express purpose of is to not earn a profit. They may pay employees including the organizers of the business and expense those expenses against funds earned or collected. There are forms and permits required and you should confer with your individual state for their requirements.
Professional Corporations or PLLC’s are created under their state’s legal requirements and provide limited protections for its members against personal responsibility for the business’s debts. All the partners must be licensed to practice the profession the business is set up to provide and all partners are liable for their own malpractice insurance and any possible liabilities incurred from malpractice. This business entity can be set up as a regular corporation or a professional corporation.
The choice you make is dependent on whether you are going alone or choosing to have partners or investors, how much protection you want or need from having your personal assets protected and how the tax requirements effect your personal or your partners own tax situations. This is not a decision to take likely. You can change the format of your business structure in the future, but making a change after you have been in business may require you to meet certain legal and tax requirements.
It’s not as hard as it may seem. And the people at
can guide you in your decision with making the right choice.