When beginning a business, an important early decision is to determine the optimal form of business structure you want to establish for your business. The right decision can help ensure a business’s success and better protects personal assets and property. As a new business owner, it is important to understand your options before you register your business through the state of your business location.
Determining the most appropriate business structure is among the most crucial decision you can make, affecting every facet of your business, including the day-to-day operations, agreed-upon management structure, administrative requirements, tax consequences, and so much more.
MOST COMMON BUSINESS STRUCTURES
Sole Proprietorship – this type of business structure is one of the easiest to set up and gives you complete control of your business. This structure is suited for a sole owner of a business. In many instances, the legal requirements and hurdles are minimal. You may not have to legally go through the process of setting up a sole proprietorship. In this format, you file self-employed or personal tax forms. A sole proprietor setup combines your personal and business assets, creating no divide between the two and putting you at potential risk, and not fully insulating you from liability, as well as other options.
Partnership – there are two types of partnership structures available: limited partnerships (LP) and limited liability partnerships (LLP). If you’re starting a business with two or more people, this could be a wise format to pursue. In partnership structures, it is necessary to execute partnership agreements, to eliminate any misunderstanding on how the partnership will operate. LPs and LLPs determine what is shared equally and when one partner has control of certain aspects of operations and how the other individuals will contribute and receive parts of the profits. Depending on a partner’s asset profile and the corporate structures selected, a partner may have to file self-employed or personal taxes. Be wary of the type of liability you retain.
Limited Liability Company (LLC) – if you’re seeking a business structure that divides your personal assets and liability from your business, then an LLC could be a good choice. An LLC can protect your personal liability in some important ways. Keep in mind, LLCs are state-specific and could have different regulations and obligations. This structure can involve one or more owners (members), requiring each owner to file self-employed/personal taxes.
Corporation – unlike any other structure previously mentioned, corporations protect your personal liability effectively, maintaining independence between your personal assets and your business. As an owner of a corporation, you do not need to file taxes on business earrings through your personal taxes but rather just on your individual earnings. Corporations file corporate taxes, can make a profit, obtain stocks, and can have one or more owners.
Nonprofit Corporation – nonprofits are unique as they benefit the public and are tax-exempt if filled through the IRS properly. As previously mentioned, all business structures have different regulations and rules. For example, nonprofits are exempt from distributing profit to members and political campaigns. And like standard corporations, owners are not personally liable and can be owned by one or more people.
Knowing the importance of this step for business owners, we have a team dedicated to discussing your options, providing counsel, and assisting with the filling process – we invite you to contact us for a free consultation.