When forming a new business, one of the first and most important decisions you’ll make is choosing a legal structure for your business. The legal structure is often referred to as a business ownership structure or business form, choices include LLCS, partnerships, sole proprietorships, corporations, non-profits, and cooperatives. No one legal structure is best for all small businesses. The business entity you choose will depend on several factors including exposure to potential liability, taxation and record keeping these reasonings will play a key role in choosing the best fit for your organization. Today, we’ll be sharing with you several factors that can affect your decision and the differences that exist between each structure.
In making an entity choice, the following should be considered:
- Your vision regarding the size and nature of your business.
• Number of co-owners of the business.
• Relationship between owners and management.
• Extent to which you will seek outside investors.
• Level of structure and formality you are prepared to manage.
• Expense, in time and money, of forming and maintaining business entities.
• Business’s vulnerability to lawsuits and other liabilities or obligations.
• Tax implications of the different ownership structures.
• Expected profit (or loss) of the business.
• Whether you will need to reinvest earnings into the business.
• Your need for access to cash from the business for personal use.
Each business structure has its pros and cons, and since every business has unique needs and goals, it’s best to do your research before choosing. The following is an overview of the various types of business structures you can choose from
- Sole Proprietorships: perhaps the simplest of all the different types of business structures. This entity is the easiest to establish for any individual starting a business. Unlike an LLC or corporations, there are no papers to file and no fees to pay in order to set up a sole proprietorship. You are the sole owner of your business, and you simply have to begin business operations in order to create a sole proprietorship.
- Partnerships: is simply a business owned by two or more people. The owners of a partnership do not need to file any papers or pay any set up fees, it simply begins when you start a business with one or more person(s). Also like a sole proprietorship, each
partner will report their share of the business profits on their personal taxes as income, and each partner is personally liable for any debts, claims or other liabilities that the business is responsible for.
All of the proceeding entities are either “incorporated” or “formed” by filing specific documentation with state or local officials.
- Limited Partnerships: Unlike a general partnership, a limited partnership costs money and can be very complicated to set up. Limited partnerships are not the best choice for a small business that has a limited potential for personal liability. Limited partnerships are normally organized by one or more persons. A Limited partnership must have one or more general partners and one or more limited partners. This form of ownership is not often used for operating retail or service businesses.
- Limited Liability Company (LLC): is a relatively new type of hybrid business structure that is permissible in most states, including New York. This entity structure provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. LLCs are the most flexible of all incorporated business entities. The entity structure allows members to divide and delineate management responsibilities, profit sharing, funding obligations, continuity of existence and dissolution as they see fit.
- C Corporation: The C Corporation is the standard type of corporation with which people are most familiar. A corporation is considered by law to be a unique legal entity, separate and apart from its owners. A corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. A corporation also pays its own taxes at the corporate income tax rate and files its own corporate tax forms each year.
- S Corporation: S Corporation owners who want the limited liability of a corporation and the “pass-through” tax treatment of a partnership or a sole proprietorship can form an S Corporation.
- Nonprofit Corporations: A nonprofit corporation is simply a corporation that was formed with the intent to carry out a purpose that is charitable, educational, literary, religious, or scientific. A nonprofit corporation can solicit charitable givings from the public, and also seek to raise funds by seeking private grant money from companies and individuals.
There are plenty of factors to take into consideration when choosing a business structure, including liability concerns and plans for future expansion. The best way to make an informed decision when choosing a business structure is to speak with an international business lawyer such as The Law Offices of Marjory Cajoux, who can provide legal advice based on your specific situation. Our firm has over 20 years of experience and we encourage you to discuss your matters with one of our experienced and knowledgeable attorneys today.