What type of business structure is best for my business?
When you start a business, you want a business structure that minimizes your risks and maximizes profits. But with so many business types to choose from, how do you know which is best for your business, and who do you trust to help get your business off on the right track?
There are four major business structures available with variations to most of those.
1. Sole Proprietorship
The simplest business structure is simply a sole proprietorship. Most businesses that choose a sole proprietorship are small businesses, often businesses of one person only. Sole proprietors pay self employment taxes, but do not suffer double taxation such as what occurs with corporations, where the corporation is taxed on earnings, then all shareholders are taxed on dividends.
However, if your business is one with potentially regular or high liability, the sole proprietorship may not be the way to go. A judgment against the business can be satisfied out of your personal assets. This is why most businesspeople choose another structure that allows limitation of personal liability.
As with most other business structures, there are multiple kinds of partnerships – a General partnership and a Limited partnership. In a General partnership, all partners have control over the company’s business and liability for its debts,
In a Limited partnership, the General partners have control over and most liability for the company. The Limited partners are essentially equity investors; they have a right to return on their investment, but no control and little liability.
An advantage to a partnership is that it pays no business taxes. Profits are dispersed to the partners, and taxed as personal income to each.
Many of the nation’s largest companies are corporations. Corporations enjoy limited liability, and the corporation’s assets are separate from those of the owners.
The corporation, like the Limited partnership, can raise money for operating expenses from investors outside the control group of the corporation. But for a corporation, those funds come from shareholders. The corporation can sell shares, and the shareholders provide the operating capital for the corporation, which then offers dividends to shareholders.
But most corporations are subject to double taxation. They are also often larger and more cumbersome to manage than other business structures.
However, the Internal Revenue Service allows the creation of what are called “S corporations.” An S corporation does not pay business taxes, and taxes are paid only once, when income and loss are passed through to the shareholders and paid on their personal tax returns. One drawback of an S corporation is that it can only have a maximum of 75 shareholders, limiting ability to raise capital.
4. Limited Liability Company (LLC)
LLC’s bring together some of the better features of the S corporation and the partnership, while avoiding some of the pitfalls of both. Accordingly, the LLC (and its derivative the “PLLC” (professional limited liability company, often utilized by white collar professions such as law and accounting)) has quickly become probably the fastest-growing business structure in the country.
Where a partnership has partners, and a corporation has a Board of Directors (for management purposes), and shareholders for funding purposes, an LLC has “members” and “managers.” A member is roughly analogous to a shareholder, and a manager to a corporate director.
But unlike a limited partnership, all member in the LLC have some rights to participate in control of the company, although a “manager-managed” LLC is mostly controlled by its manager(s).
Like an S corporation, an LLC pays no business income taxes, with profits and losses distributed to the members and reported on their personal income tax returns. But unlike an S corporation, an LLC is not limited to 75 members, making capital acquisition potentially somewhat easier.
With an LLC, only LLC assets and the members’ capital contributions are available to creditor judgments against the company. The members acquire no personal liability for the company’s debts.
LLCs do not have shareholders, and they can be formed with only one member.
The best form for your business is as unique as your business idea. Don’t start out by making a mistake that could cost your company dearly.
Make sure your venture starts on a solid foundation. Contact Integrity Law for a free consultation today, and let’s get your business on the road to making money!