Before starting your business, you’ll want to begin thinking about the structure that you want for your business. Depending on your goals and needs, selecting an appropriate business structure is very important. Before deciding which type of entity is best for your organization, it’s always best to consult with an attorney.
The different types of entities include sole proprietorships, partnerships, corporations, amd limited liability companies. Important considerations when choosing a business are liability, tax treatment, and business formalities.
Sole proprietorships are the default business structure for single individuals conducting business. No forms are required to conduct business as a sole proprietor, so there are no fees involved. However, the downside is that you are personally liable for the debts of the business. This is why forming a distinct business entity, such as an LLC, is extremely important.
If two or more people carry on a business, the default business structure is a partnership. When a partnership is formed, each partner is fully liable to all other partners. Due to this reason, forming an alternative business entity, such as a Limited Partnership or LLC, is critical when two or more people work together to form a business.
Limited Liability Companies
Forming a limited liability company is highly advisable for small businesses. An LLC is essentially a blend of a partnership and a corporation. LLCs are easy to set up and maintain. LLCs offer the same liability protection as a corporation since it is a separate legal entity, so the members of the LLC, in most cases, are not personally liable for the debts of the business. LLCs also offer a very flexible management and ownership structure and don’t require as many formalities as corporations. Additionally, LLCs are taxes like a partnership rather than a corporation where the company’s profits and losses pass through to its members.
Corporations also offer liability protection for the owners, but generally require more formalities to be followed such as electing a board of directors, naming officers, and conducting board meetings pursuant the corporate bylaws. There are two types of corporate structures: (1) S Corporation; and (2) C Corporations.
S Corporations are closely-held corporations with only a few owners. These types of corporations are not taxed as a separate legal entity provided that certain legal requirements are met.
C Corporations, on the other hand, are taxable entities unlike S Corporations and LLCs.