If one meal selection suited every individual diner, there wouldn’t be a need for menus. The same holds true with business structures. Selecting the best option for your business and the bestformation for your business requires the assistance of and a consultation with a competent business attorney.
Sole Proprietorship
Themost direct form of a business is a sole proprietorship. A sole proprietorship is the default business form and takes no filing with the state or county, unless you want to register a DBA in conjunction with it. It is easy to organize, inexpensive and simple to manage at tax time. However, it does havesignificant drawbacks as well,the most important of which is thatit doesn’t protect the business owner from personalliability for actions taken by the business.
Partnership
Next, and slightly more involved is a partnership. This can be either a general partnership, which is a default business form and does not need any state or county filings,or a limited liability partnership (LLP). Both provide the advantage of pooled resources from two or more owners andforming anLLP provides additional protections from liability for the partners. In both types of partnerships, theassistance of business attorneys can be useful in order to protect everyone’s interests.
Limited Liability Corporation (LLC)
A limited liability company provides similar liability protection for a singlemember or multiple memberswhile providing an abundanceof flexibility. Depending on the business activity, it can be a more useful tool than a corporation and it can still enjoy the tax advantages of a corporation, rather than being taxed as a partnership. The formation rules for an LLC vary state by state, therefore, during the formation of an LLC, it is advisable to seekassistancefrom a business attorney in orderto avoid mistakes. Regardless of the election to tax an LLC as a corporation, howan LLC is treated for tax purposes can be complicated and you willbenefit from the expert guidance of a business attorney.
Corporations
There are two different types of corporations, an S corporation and a C corporation,and they will be treateddifferentlyfortax purposes:
- S corporation: While both forms protect the owners from liability, the advantage of an S corporation is that it is single-taxed, as all profits from the business will flow directly to the shareholder’s personal 1040 tax return. Shareholders report flow-throughincome and losses on their personal tax returns, which prevents double taxation on corporate income. There are many restrictions on S corporations. However, the S corporation can protect its owners from liability so long as the corporate veil is not pierced. In addition, an S corporationhas restrictions on the number of shareholdersit can have, and cannot own other S corporations.
- C corporation: The C corporation is acomplex business formation that can be used for a multitude of business types. However,it has the disadvantage of being subject to double taxation as profit is taxed to the corporation when earned, and again to the shareholder during the distribution of dividends. C corporationshave an abundance offlexibility and protection, however,it will bea separate taxpaying entity.
Of course, the summary of thesefour business formation options are just the tip of the iceberg. For a more in-depth look at potential business structures and how each could benefit your business, contact the business attorneys of Goldstein & Scopellite, PC.
