Choosing a Business Structure

Posted on by Prapti

You will need to classify how your business will be legally recognized since this will weigh heavily on your

eligibility to secure grants, business loans or attract investors.

Take the time to explore the different types of business structures and choose the one that will best suit

your company’s needs. Since changing your legal business structure is both time consuming and costly it

is best to plan for the future and consider your company’s long term goals.

Although you are not required to hire an attorney to prepare or file any of the paperwork, it is

recommended that you consult with a tax professional to establish which legal structure is best for you.

The most common types of ownership in the United States are:

• Sole Proprietorship – This is the least costly and simplest legal business structure. As the owner,

you will file all your profit and loss reports on your personal income tax return. In a sole proprietorship

you can also create any name you wish to do business under (Doing Business As/DBA).

• General Partnership – Just like in a sole proprietorship, owners are not required to file anything

with the state in order to form their entity. The partnership is legally owned by two or more people who

share the company’s losses and profits. Since each partner is liable for the business, debts can be

collected from whichever partner seems to be the easiest to collect from. All particulars of responsibility

with regards to the business must be outlined and clearly detailed in the Partnership Agreement.

• Limited Partnership – Although similar to a general partnership, a limited partnership allows for

partners to own a portion of your business without direct participation in daily operations. These are

commonly known as “silent partners” and allows for part ownership without taking on any liabilities of

the business. However, a limited partnership must have a general partner who assumes all the

business’s liabilities.

• Limited Liability Partnership (LLP) – The limited liability partnership is mainly used by accounting

firms and law firms and is subject to states that have a limited shield law. Since laws governing LLP

partnerships vary widely from state to state, it is recommended that you check with your particular

Secretary of State for specific state regulations. LLP’s are governed by the same tax laws as a partnership

but include liability limits of all the business’s partners similar to an LLC (Limited Liability Company).

• “C” Corporations and “S” Corporations     7

o A standard “C” Corporation does not link the business’s profits or losses to the

individual tax returns of the owners but may require payment of certain annual fees or state

franchise taxes. The tax implications of “C” Corporations can be quite complex and therefore a

tax professional should be consulted before a company decides to incorporate.

o Once a business has completed the corporation process, the stockholders can file the

appropriate paperwork with the IRS to receive their “S” Corporation standing. As in a

partnership, the owners must file the profits and losses of the corporation in their federal tax

returns according to a percentage of their stock ownership. This corporation category is often

best for a small business in which most of its shareholders are directly involved with the daily

activities of the business and are employed by the corporation.

Additionally, the majority of the income in an “S” Corporation is dispersed to the shareholders on an

annual basis.

• Limited Liability Company (LLC) – Just as in a corporation, officers, owners and directors are

protected from the company’s liabilities. However it is common to pay a franchise tax which differs for

each state. Since an LLC is relatively low in cost to create and provides flexibility, this structure is gaining

immense popularity with small businesses. Rather than through stock ownership, it is through the LLC

Articles of Organization that determine profit and loss disbursements, member voting power and

percentage of ownership. An LLC Company may also elect to be taxed as either an “S” corporation or a

“C” corporation.

• Nonprofit Corporation – Almost any type of business can be a non‐profit corporation. Although

non‐profit companies can have employees that receive salaries, there are technically no owners and all

profits are reinvested into the corporation to continue its work. Since there are numerous regulations

governing nonprofits, setting one up does have its challenges, however many people whose  objective is

for a social vision rather than huge profits choose this structure and simply draw a salary as an employee

of the corporation.

• Professional Limited Liability Company (PLLC), Professional Association (PA), Professional

Corporation (PC) – Certain professions such as physicians, engineers, lawyers, architects, etc. have entity

forms that require special licensing regulations and are subject to malpractice liability. It is necessary to

check with your local Secretary of State as it is generally required to have all formation paperwork and

documents approved by your state licensing body prior to being filed.

Take some time to find out about the details of each business structure. The following sites will provide

helpful information on each type of business outlined above.

Choose your Business Structure

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