So, you’re starting a business. What now? How will you structure it? There are many choices to consider. Some of the more common choices are:
- Sole proprietorship
- S corporation
- Limited liability company
Each has specific nuances, legal requirements and tax implications, so the decision will be based on individual business needs. Here is a brief overview of the most common ones:
Sole Proprietorship: This is the most basic and common business structure. Individuals who identify as freelancers, consultants or independent contractors are usually sole proprietors. In this structure, the individual and the business are generally treated as the same entity, as there is no formal set up. An individual’s assets are not separated from that of the business and the individual is personally liable for the business’ debt.
Corporation: A corporation is a legal entity that is owned by shareholders. It is formed in accordance with the laws of the state where the corporation is registered. The administrative costs and tax implications of setting up a corporation are such that it is usually larger companies that choose this business structure. Corporations are a separate tax paying entity. In other words, a shareholder of the corporation who is also an employee of the corporation will pay their taxes on their wages, but the corporation is also responsible for applicable taxes, including any taxes owed when dividends are paid to shareholders. This is what is sometimes referred to as “double taxation.” The business structure of a corporation generally protects shareholders’ personal assets.
Limited Liability Company: As its name suggests, the limited liability company (LLC) is a business structure that protects its members’ personal assets. The owners of an LLC are usually called members. While the process to set up a limited liability company varies from state to state, in many instances the following is required:
- Choose and register your business name, ensuring that no one else has already established an entity with the same name;
- File the Articles of Incorporation, which is a document that contains basic information such as the limited liability company name, its members’ names, and the address of the business;
- Establish an Operating Agreement, which provides guidelines and rules among the members of the limited liability company; and
- Make necessary announcements – some states require LLCs to publish an announcement in a newspaper or other publication according to that state’s rules.
S Corporation: Businesses that want some of the benefits of a corporation, but do not want the same tax liabilities may choose an S Corporation if they qualify. S Corporations allow business profits and losses to flow through personal tax returns of the shareholders. Any shareholder who works for an S Corporation must be paid a “reasonable salary” in order for the S Corporation to avoid IRS tax penalties. An S Corporation provides some protection against personal liability of shareholders.
Partnership: A partnership is a business entity where two or more people share ownership. Partners share in the profits and losses of the business. The process to form a partnership is simpler than some other business structures and usually involves registering the business and its name through the secretary of state. Partners are not shielded from personal liability, and they all share responsibility of all business debts, even if incurred because of another partner.
Once you choose the business structure that best suits you, Virtual Paralegal Services can help. We can assist with checking for name conflicts, drafting bylaws or operating agreements, stock certificates and other necessary documents.
Let us make the process easier for you, so that you may focus on your business. Contact us today to discuss your unique needs.