One of the most important choices you will make when starting a business is the type of legal structure you select for your company. The legal structure of your business can impact the amount of taxes you pay, the record-keeping required for your business, and the amount of personal liability you will be exposed to. Selecting the right entity can protect your private assets from liability or make it easier to secure capital. You should choose a business structure that gives you the right balance of benefits and protection. Here are common entity types to understand your options.
The sole proprietorship is the most common business structure. This is easy to form and offers complete control to the owner. Under this structure, you are the sole owner and operator of your business. The owner is personally liable for all financial obligations of the business. This means your business assets and liabilities are not separate. You include both business expenses and personal income on your personal tax return. Sole proprietors are liable for business liabilities, debt, and losses. If you go into debt, your personal assets may be at risk.
A partnership is a business that two or more individuals own and operate together. Two or more people agree to share in the profits or losses of a business. A primary benefit of the partnership is that income is passed through to partners to report on their individual income tax returns. The downside is that each partner is liable for the financial obligations of the business.
Partnerships can be either general or limited. In a general partnership, the partners are all actively involved in managing the business. General partners have personal liability for any debts or obligations. In a limited partnership, limited partners serve as investors for the business and typically have no business decision rights.
Limited Liability Company
A limited liability company (LLC) lets you take advantage of the sole proprietorship, corporation, and partnership business structures. An LLC separates business and personal liabilities. LLC provides you with liability protection, like corporations, without double taxation. You can pass through taxes on the personal income level. Owners in LLCs are shielded from personal liability. Check with your state for specific LLC regulations.
A corporation, or C Corp, is an independent legal entity separate from its owners. While corporations are subject to more regulation and tax requirements, they also provide you with the strongest protection from personal liability. A corporation is a good option if you want to expand your business by selling stock to raise capital. Corporations are double-taxed. The company is taxed as a business entity, and each shareholder’s personal income is taxed.
An S corporation, or S Corp, is a type of corporation that provides liability protection and tax benefits. The profit and loss are passed through directly to the owner’s personal income without being subject to corporate tax rates. Shareholders must be U.S. citizens. An S Corp can’t have more than 100 shareholders. Only owners, or shareholders, of the business, are taxed. You can avoid double taxation by electing to operate as an S Corp.
You will save yourself headaches and money in the long run by getting advice from business experts. You can seek advice from an attorney and an accountant who can share valuable information throughout the life of your business. It is well worth the investment to get expert advice upfront to help you select the best type of entity for your business. One size does not fit all.
Disclaimer: The information provided on this site is not legal advice, and no attorney-client or confidential relationship is or will be formed by use of the site. The information contained herein is intended as legal information only and of a general nature. All areas of the law are fact-specific. You should consult with an attorney licensed in your jurisdiction about your particular situation and circumstances.
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