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 best formation for your business requires the assistance of and a consultation with a competent business attorney.
The 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 have significant drawbacks as well, the most important of which is that it doesn’t protect the business owner from personal 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, or a limited liability partnership (LLP). Both provide the advantage of pooled resources from two or more owners and forming an LLP provides additional protections from liability for the partners. In both types of partnerships, the 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 single member or multiple members while providing an abundance of 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 seek assistance from a business attorney in order to avoid mistakes. Regardless of the election to tax an LLC as a corporation, how an LLC is treated for tax purposes can be complicated and you will benefit from the expert guidance of a business attorney.
There are two different types of corporations, an S corporation and a C corporation, and they will be treated differently for 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-through 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 corporation has restrictions on the number of shareholders it can have, and cannot own other S corporations.
- C corporation: The C corporation is a complex 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 corporations have an abundance of flexibility and protection, however, it will be a separate taxpaying entity.
Of course, the summary of these 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.