When you decide to go into business for yourself, you want to make sure that your business has the structure that best meets your needs. The business structure you choose will impact how your profits are taxed and whether you will be personally liable if your business gets sued. A business law attorney in your area can assist you throughout the business formation process.
While business structures will vary depending on which state you choose to open your business in, the most common business structures include:
- Sole proprietorship
- Partnership (General or Limited Liability)
- Limited Liability Company (LLC)
- Corporation (S-Corp or C-Corp)
What should I consider when choosing a business structure?
Each of the above business structures offers its own advantages and disadvantages, so the one you choose will require you to consider the following factors.
Choosing the right business structure will depend on how much personal liability you want to have in case something goes wrong. Generally, if you choose a sole proprietorship or general partnership, you are you will be personally liable anytime the business suffers a loss. With a limited liability partnership, only the general partner will be personally liable for debts. To protect your personal assets, it may be in your best interest to choose an LLC or corporation, which would limit your personal liability.
Each structure has its own income tax structure, which will affect how your business profits are taxed. With ‘pass-through entities’, such as sole proprietorships, partnership, S-corporations, and some LLCs, profits will pass to the owners of the business and the owner will report them on their personal tax returns. However, owners of C-corps and LLCs that choose to be taxed as a corporation, will not pay taxes on the net business profits of their corporation, as their business is a separate entity.
Formation and Continuing Operation Costs
Before choosing a structure, you will need to consider how difficult it is to form and how much it will cost to establish and continue operating the business over the years. Sole proprietorships and general partnerships are generally the easiest to set-up as they do not require you to file paperwork and do not cost anything to establish or maintain. LLCs and corporations on the other hand, require you to file “Articles of Incorporation” with the secretary of state and pay fees to establish the business as well as fees to maintain the business (typically annual).
Choosing the right business structure for your business is critical to your future success. An attorney in the Elizabethtown area can provide you with the support you need as you start your business.