When starting a new business, one of your earliest and most important steps is choosing the legal structure under which your business will operate. The right choice will depend upon several different factors, including the size of your business, the type of business and what your goals and needs are as you move forward. Your decision will impact how you are taxed and what your legal obligations are, so choose carefully, and remember that as your business grows and changes you will always be able to make a change.
Below you will find a helpful list of the most common types of business entities and a few of their advantages and characteristics.
- Sole proprietorship – One person is responsible for all profits, debts and decisions. No separation between business and the individual either for taxation or for liability. This is the easiest legal structure to establish, requiring very little paperwork, low costs to operate and eligibility for certain business tax deductions. Sole proprietorships are also very easy to dissolve.
- Partnership – Owned by two or more individuals who either share equally or where one partner has control and other(s) contribute to and share portions of profits and losses. Easy to form, requiring very little paperwork beyond Articles of Partnership agreement. May require a business license. Partners report income or loss on their individual income tax returns, while the partnership itself does not pay income tax.
- Limited Liability Company – Owners, partners and shareholders are shielded from liability for the organization’s debts but have the tax benefits of a partnership, with earnings and losses passing through as income on personal tax returns.
- Corporation – Operates as a separate entity from its owner, with its own legal rights. Corporations can be sued, can buy and sell property, and can sell stock certificates that provide rights of ownership. Corporations pay a variety of filing fees when they are first formed. There are several types of corporations, including C corporations, S corporations, B corporations, closed corporations and nonprofits. Each has its own tax and liability rules. Establishing a business as a corporate entity allows greater ease of raising capital from investors, established rules for transferring shares, and limited liability for stockholders.
Deciding on the right type of structure is right for your business requires careful thought and planning and a good understanding of all the consequences of your decision. For assistance, contact our experienced small business law firm today to set up a time for a consultation.