Making the decision to start your own business is an exciting and momentous time in anyone’s life. Taking your ideas and turning them into a tangible reality is a big step. When you take that step, you want to make sure that you thoroughly think through the organizational needs of your future business and what structure might best encourage it to thrive. When making this decision, it is important to think of the anticipated size, purpose, and goals of your business. Ultimately, the structure that you select for your business will influence any number of things – from taxes, to how you operate on a daily basis, and even what portion of your personal assets are at risk. Therefore, it is important to thoroughly consider all of your options and to seek qualified legal counsel as to the structure that might best serve your needs.
Prior to registering your business, you will need to decide on the business structure. Some of the most commonly used structures include:
- Sole Proprietorship: A sole proprietorship is essentially the default structure of a business in a situation where someone conducts business activities but does not register as any other kind of business. It is not considered a separate business “entity,” which means that the assets and liabilities of the business are not separate from the owner’s personal assets and liabilities. Sole proprietorships are often a wise choice for those individuals who have a low-risk business idea that they want to test before creating a more formalized type of business structure.
- Partnership: Partnerships are often considered the simplest type of business organization for two people, or more as the case may be, who wish to go into business together. A partnership is a good structure for those businesses with more than one owner as well as for professionals including attorneys, engineers, or architects, and for groups who want to begin their businesses at a slightly less formal level than a corporate structure. There are two frequently utilized types of partnerships:
- Limited Partnerships (LP): Limited partnerships only have one general partner who has unlimited liability and who pays self-employment taxes. The other partners in the partnership have what is considered “limited” liability and also a more limited controlling role in the company. This sort of arrangement is typically outlined in a partnership agreement, and profits from this sort of arrangement are included on personal tax returns.
- Limited Liability Partnerships (LLP): These partnerships are similar to limited partnerships, although each owner under this structure has limited liability. As a result, each partner is protected from the partnership’s debts and will not be liable for the actions taken by the other partners.
- Limited Liability Company (LLC): In essence, a limited liability company is a combination of the benefits offered by the partnership and corporate organizational structures. In the majority of instances, the personal assets of the LLC members are protected from liability. In an LLC, the profits, as well as any losses, are passed through to personal income. This means that the LLC structure essentially limits corporate taxes. Most members of an LLC are, however, viewed as being self-employed for tax purposes and must therefore pay self-employment taxes. For those businesses that are considered medium or higher-risk, who have members with significant personal assets that they would like to protect, or for owners who would want to pay at a lesser tax rate than they would under a corporate structure, an LLC can be an excellent choice.
- Corporation: Often considered the most formal type of business structure, corporations provide strong protections to shield owners from personal liability, though in exchange, they also require significant and detailed record-keeping and reporting requirements in addition to having more detailed operating processes. Unlike the aforementioned business structures, corporations generally pay income taxes on profits, though there are some exceptions to this rule, which an attorney can explain to you in detail should you be interested in this type of business structure. In some cases, corporations can actually be taxed more than once – the first time, when a profit is initially made, and then a second time when the dividends are paid to shareholders and included on their personal tax returns. A corporation and its shareholders are considered separate entities, such that if a shareholder sells his or her shares, the corporation will continue conducting business normally. Two of the most common types of corporate structures include:
- C Corp: A C corporation is the most general type of corporation. It has all of the characteristics outlined above, and it is an entity distinct from its owners. A C Corp can earn a profit, have legal liability, and be taxed.
- S Corp: An S Corporation is a corporation intentionally structured to avoid the double taxation often applicable to C corporations. An S corporation is structured for some of the profits and losses to pass through directly to the owners’ personal income without being subject to corporate tax rates. Additionally, S corps have special limits – a limited number of shareholders, certain filing and particular operational processes, and other characteristics necessary to qualify.
Corporations are generally a beneficial structure for businesses that are either medium or high risk, need to raise money or businesses that eventually plan to be sold or go public.
- Non-Profit Corporation: Non-profit corporations are organized for charitable, educational, religious, or scientific work. As their work is intended to provide a public benefit, these businesses can receive a tax-exempt status, which they must request and receive from the IRS. Non-profits follow rules similar to a regular C corporation in many respects.
- Cooperative: This is a business structured owned by and operated specifically for the benefit of those utilizing its services. Under this structure, earnings generated by the cooperative are distributed between the members, who are often called user-owners. Cooperatives are often run by a board of directors and its officers are chosen through an election.
Call 303 Legal Today
If you are ready to take the next step in turning your business dreams into reality, at 303 Legal, we would welcome the opportunity to do exactly that. Our talented and experienced legal team can help you make the best decision on an organizational structure that will fit your business, and then help you implement that decision to get your business up and running. Starting a new business is exciting, and we would be honored to be a small part of your journey. Call us today.