Starting a business can be exhilarating, overwhelming and incredibly fulfilling. From the very beginning you are making decisions; from logo designs, marketing plans, brand colors to the formation of your business. Choosing your business structure is very important when it comes to making your first business decisions.
Several choices are available to you, and you should keep all the advantages and disadvantages in mind. You can choose between a sole proprietorship, a partnership, a limited partnership, a limited liability company or a corporation. What is the right structure for your business? That depends on a number of factors. Before that decision is made, you must understand the different options available to you and your business. Let’s break it down.
First, let’s understand what defines each of these business structures.
1. General Partnership
A general partnership requires at least two partners and must be defined by a legal partnership contract. Partners, like sole-proprietors, are not employees, and personal assets and partnership assets may be at risk. When forming a general partnership, no separate income tax is paid as income passes through the individual partner's tax returns - although, a separate declaration (1065) must be produced.
2. Limited Partnership
A limited partnership comprises of one or more limited partners and one or more general partners. A limited partner differs from a general partner in that he is personally liable only to the extent of the capital he has contributed to the company and they do not participate directly in the management of the company.
3. Limited Liability Company
A limited liability company combines the benefits of a corporation and a partnership. Like a corporation, a “LLC” becomes a separate legal entity and therefore, owners can open up a bank account, get a tax identification number and do business, all under the “LLC’s” own name.
4. Corporation (for profit)
A Corporation is a more complex business structure. A corporation has certain rights, privileges, and liabilities beyond those of an individual. Doing business as a corporation may yield tax or financial benefits, but these can be offset by other considerations, such as increased licensing fees or decreased personal control. Corporations may be formed for profit or nonprofit purposes.
If electing to form a for profit corporation, one must consider in consultation with their tax professional whether to elect c or S corp status for tax purposes.
A C-Corp is a legal business structure in which the owners, or shareholders are taxed separately from the entity. C-Corps also do not have any restriction on ownership and can be subject to double taxation.
An S-Corp offers many of the same protections to its shareholders as a C-Corporation. However, revenues generated by S-Corporation through individual shareholders are returned to the company that files an income tax return without paying tax. This is true even if the company does not distribute funds to shareholders. Also, the limit for shareholders is 100 people who are US citizens or resident aliens.
5. Nonprofit Corporation
A Nonprofit Corporation is a legal entity and is typically run to further an ideal or goal rather than in the interests of profit. Many nonprofits serve the public interest, but some engage in private sector activities. Charitable activities may require additional registration.
Choosing the right business structure is one of the most important decisions you can make in the beginning of our startup journey. Speak to a professional corporate lawyer at Bretz, Flynn, and Associates Today!
At Bretz, Flynn and Associates, we counsel our clients in connection with formation, compliance, regulatory, and litigation matters. In assisting our clients, we draw upon the significant industry experience of our lawyers, who include the former general counsel of a broker-dealer.
Our clients tend to be entrepreneurial and range in size from family offices to large corporations. Bretz, Flynn & Associates provides counsel at every stage, from formation through sale, disposition or succession to later generations.
Should you need any assistance to ensure your business remains successful and profitable, contact Bretz, Flynn & Associates today at (815) 740-1545.