Choosing the wrong legal structure for your business may put your personal assets at risk or result in unintended tax consequences. Consequently, it is important to consult with a business law firm to choose the legal structure that is appropriate for your business and personal needs.
Sole proprietorships are the simplest structure. In fact, an owner who has no partners and hasn’t set up other entities for the business may not have to file any paperwork. However, there is no distinction between the owner and the business. The debts or profits of one are imputed to the other. The owner pays personal income taxes on all profits. If the business has a different name, the owner simply needs to register the operation as a d/b/a business form.
Multiple partners who want the equivalent of a sole proprietorship may opt for a general partnership. However, each general partner can be liable for the entire liabilities of the partnership. The operations are taxed at the personal level. Although paperwork may not be required, our law office would recommend drafting a general partnership agreement. If disputes arise between the partners, a general partnership offers minimal protection.
A limited liability company separates the individual from the business, and also offers flexibility in tax structure and protections from liability. Income from the LLC can pass through to the owners, like a general partnership, unless the LLC owners elect to be taxed similar to an S-corporation or C-corporation. Paperwork must be filed to set up this structure. This entity can also raise money for operating capital. Best of all, an individual does not need partners to set up an LLC. If there are multiple partners, we would advise drafting a comprehensive operating agreement.
Finally, C-corporations allow the owners to raise money by taking the company public. The owners are treated separately from the business. However, owners may have to pay both corporate and personal taxes, sometimes referred to as double taxation. Extensive paperwork is also required to set up a C-corporation. Unlike an LLC, there are also ongoing requirements to maintaining this structure, such as shareholder meetings.
Source: FindLaw, “Choosing a Legal Structure,” copyright 2017, Thomson Reuters