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 bestÂ formation for your business requires the assistance of and a consultation with a competent business attorney.
TheÂ most 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 haveÂ significant drawbacks as well,Â the most important of which is thatÂ it doesn’t protect the business owner from personalÂ liability for actions taken by the business.
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,Â or a limited liability partnership (LLP). Both provide the advantage of pooled resources from two or more owners andÂ forming anÂ LLP provides additional protections from liability for the partners. In both types of partnerships, theÂ assistance 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 singleÂ member or multiple membersÂ while providing an abundanceÂ of flexibility.Â 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 seekÂ assistanceÂ from a business attorney in orderÂ to avoid mistakes. Regardless of the election to tax an LLC as a corporation, howÂ an LLC is treated for tax purposes can be complicated and you willÂ benefit from the expert guidance of a business attorney.
There are two different types of corporations, an S corporation and a C corporation,Â and they will be treatedÂ differentlyÂ forÂ tax 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-throughÂ income 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 corporationÂ has restrictions on the number of shareholdersÂ it can have, and cannot own other S corporations.
- C corporation: The C corporation is aÂ complex business formation that can be used for a multitude of business types. However,Â 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 corporationsÂ have an abundance ofÂ flexibility and protection, however,Â it will beÂ a separate taxpaying entity.
Of course, the summary of theseÂ four 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.