One of the most important early decisions that you need to make when beginning a new enterprise is the kind of legal structure that the business will use. This decision will influence how your company is structured, as well as how it will deal with liabilities and taxes. Because this is a crucial step in the building process, it is in your best interest to investigate all of the possibilities and make an informed decision.
Types of Commonly Used Business Structures
In the United States, there are five primary organizational structures that can be utilized for a company:
Single-Owner Business or LLC
One person owns and runs the company as an extension of themselves under the sole proprietorship business structure, which is the simplest and most prevalent form of business organization.
Both the assets and the liabilities are directly the responsibility of the owner. Both the profits and the losses are reported on the individual tax return of the owner.
There are no formal documents that must be completed in order to incorporate, other than the standard licensing and permit applications. Putting up this structure is a breeze and won’t break the bank.
Cooperative effort
When two or more people decide to jointly own and run a commercial enterprise as co-owners, this type of association is known as a partnership.
Partners split not only the profits and losses of the business but also the responsibility for any debts or other liabilities that may arise. The obligations and responsibilities of each party are laid out in an agreement governing the partnership.
A partnership, much like a sole proprietorship, does not offer its owners any form of liability protection, and all revenue and losses are passed through to the tax returns of the partners.
Corporation (C)
A separate legal body that is responsible for filing its own tax return and paying taxes on earnings achieved is referred to as a C corporation.
Shareholders who have been given stock as evidence of their ownership are referred to as owners. Personal assets are shielded from corporate obligations when a corporation is formed to hold their ownership.
When forming an entity, additional legal paperwork and record-keeping are required. Additional capital may be obtained through the public stock markets by C corporations.
S Corporation (S-Corp)
The tax advantages of a partnership are available to shareholders of a S corporation, while the liability protections of a C corporation are maintained. Owning stock requires either US citizenship or permanent residency.
Both profits and losses are distributed evenly among shareholders, just like in a partnership. In addition to completing the requirements, filing requires a one-time election to be made to the IRS.
LLC stands for “limited liability company.”
A limited liability company (LLC) is a business structure that combines the tax benefits of a sole proprietorship or partnership with those of a corporation.
Members are another name for owners. A limited liability company (LLC) is a type of legal corporation that can shield its members from legal responsibility regarding their individual assets.
Choosing a Form: Important Considerations and Criteria
The total amount of owners
One person can be the only owner of a sole proprietorship. A successful partnership requires at least two participants. Multiple shareholders or members are permitted under the form of an LLC or corporation.
Protection from Legal Obligations
Both a sole proprietorship and a partnership offer no protection from legal responsibility. Structures such as limited liability companies (LLCs) and corporations do, in fact, shield personal assets from the claims and liabilities of businesses.
Techniques of Taxation
Profits and losses from sole proprietorships and partnerships are reported on the owners’ individual tax returns. An LLC may elect to be taxed as a pass-through entity or as a C or S company.
Plans for the Future
It’s possible that someday you’ll need to incorporate in order to gain access to public stock exchanges in order to raise investment cash. A limited liability company (LLC) has the potential to evolve into a corporation down the road and perhaps go public.
Standards for the Sector
Because of the established criteria of legitimacy, certain regulated industries, such as professional services, frequently adopt business forms such as limited liability companies or corporations. Those who conform have a higher credibility.
Additional Considerations
The requirement for startup capital, whether in the form of an investment or otherwise, continuous compliance, the capacity to attract high-quality staff, and succession planning in preparation for the transfer of ownership.
Choosing the Right Structure for Your Company
Instead of relying on a single quality, the most successful decision for a new business endeavor will most often be determined by a particular combination of these elements. When making such an important choice, be sure to take your time, thoroughly consider all of the potential outcomes, and make plans for ongoing development. Keep an open mind; the option that appears to be the easiest at first could not fit your needs in the long run. Additional advice that is specific to your circumstances can be provided by an attorney or advisor.
In the end, you should select a structure for the company that is congruent with your vision, level of risk tolerance, and strategic goals for the company. Find the optimal compromise that will allow you to launch your business successfully while leaving room to adapt your strategy to the changing circumstances that will surely arise over time.
There are five common combinations of business structures.
Because there is no one solution that is optimal for every commercial endeavor, several companies have adopted hybrid architectures that meet many considerations:
Pass-through taxation can be preserved while personal responsibility can be limited by combining a sole proprietorship with a limited liability company (LLC).
Collaboration between different LLCs: LLC members enjoy the benefits of partnership governance while maintaining their personal liability shields.
Combining the advantages of both corporate benefits and partnership structure into a single entity through a single tax election is what a limited liability company that is taxed as a S corporation does.
Umbrella structure splits divisions for financing, investments, or acquisitions, and C Corp holding companies with subsidiaries have this structure.
Holding companies that also hold their subsidiaries as LLCs or C corporations exercise centralized control and ownership over all of their affiliated business units.
Remember to Keep in Mind the Legal Requirements
Make sure you are aware with the regulations that govern the formation of business formations in your state. Maintain compliance with the annual filing of required documents such as taxes, licenses, and fees. If altering structures or ownership involves sophisticated transactions, you should seek the advice of an attorney. When taken together, giving careful consideration to each of these aspects will position your company optimally to capitalize on future opportunities.
