The Wrong Business Structure
Can Cost You!
One of the more important legal issues is to select a business structure for your business. There are several different structures or forms that a business can take. The task here is to understand the advantages and disadvantages of each form before making this decision. Also, there is no “perfect” business structure for all organizations. With this in mind, review the most common forms of business below. Make a selection keeping in mind the specific needs of your company and the advantages and disadvantages of each business structure including its tax implications… 1. Sole Proprietorship 2. Partnership 3. Corporation 4. Limited Liability Company (LLC) Sole Proprietorship A sole proprietorship is an informal structure that is the easiest and least expensive to form. It can be owned by a one person or a husband and wife team. In a proprietorship, the owner runs the business, has personal responsibility for the debts of the business, and can easily sell all or part of the business. Additionally, the owner can report any profit or loss from the business on his/her personal income tax returns. Limited Liability Company (LLC) The advantages of an LLC include limited liability that a corporation offers while also providing the tax advantages of a partnership or sole proprietorship. Profits or losses are passed through the company to its members and reported on their personal tax returns in the proportion specified in the LLC operating agreement, or the LLC can elect to be taxed like a corporation. LLCs do not have stock and are not required to observe corporate formalities. Owners are called members, and the LLC is managed by these members or by appointed managers. The LLC is usually considered advantageous for small businesses because it includes the limited personal liability characteristic of a corporation with the tax advantage of a partnership or sole proprietorship. General Partnership A Partnership is also inexpensive to start. It is an agreement in which two or more individuals or entities own and operate a business. Profits, losses, and managerial duties are agreed upon among the partners, and each of the partners is personally liable for any partnership debts. A partnership does not pay any income tax at the partnership level. They file an informational return to report income and expenses. The partnership passes the profits or losses and other information to the individual partners who report the information on their personal tax returns. C Corporation (Inc. or Ltd.) A Corporation is a legal entity that is separate and distinct from its owners. Its a more complicated business structure that usually costs more to start up than the other legal structures. Each of the owners holds shares of stock in the company. Corporations can be created for profit or nonprofit purposes and may be subject to increased licensing fees and government regulation than other structures. Profits are taxed both at the corporate level and again when distributed to shareholders.The most important feature is the limited liability of the shareholders. Owners (Shareholders) are not personally liable for debts of the Corporation unless certain legal issues and corporate formalities are not observed. These formalities include: • issuing stock certificates • electing directors or ratifying the status of existing directors • holding annual meetings • recording the minutes of the meetings Corporations, because of their more complex nature and additional legal issues, should be assisted by an attorney well versed in corporate law. A major drawback of the Corporation is double taxation. That is, profits are taxed at the corporate level and then again at the personal level. Sub Chapter S Corporation (Inc. or Ltd.) The Sub S Corporation has many of the same features of the C Corporation but offers avoidance of double taxation. An S Corporation is taxed like a partnership (profits or losses flow directly to the individual owners personal tax return) if it meets the requirements for S status. The corporation is not taxed.
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