When starting a new business or taking the next step forward in your current business, the decision on which type of business form to operate under can have significant implications for your business far into the future. Choosing the right form for your business can reduce your personal liability, add credibility to your business, provide tax advantages, allow easier access to capital funding, set up the management structure, and create an enduring business that stands the test of time.
Get advice about whether to operate as a:
The Law Office of Janna I. Jamil will guide you to the best organization for your individual business based on your needs and goals. Some of the specific issues that must be considered include start-up expenses, the varying complexity of the different business forms, tax consequences, personal liability issues, and satisfying the continuing legal requirements of statutes and regulations your business will be subject to.
To help you get started on deciding which business form is best for you, consider the following introductions to the major business forms:
Sole Proprietorships are businesses in which one person both owns and manages the business. The owner/manager takes in the business profits (and losses) directly. The income generated by the business is then taxed on the owner/manager's personal income taxes and not at the business level. Sole proprietors are personally liable for all business obligations. While some business owners find this form advantageous due to the relatively low start-up cost (in comparison with business forms that require statutory establishment, such as corporations), sole proprietors may still need to obtain business-specific licenses, as well as comply with employment/labor laws.
General Partnerships involve two or more owners operating a business for profit. Business profits are taxed as personal income for the partners. This tax advantage makes partnerships very attractive to many businesses. Regarding liability, just as sole proprietors are personally liable for all business obligations, partners are personally liable for all business obligations as well. To limit liability, either a limited partnership (LP) or a limited liability partnership (LLP) may be formed in some circumstances and if certain statutory requirements are met.
Corporations become separate legal entities upon formation. This is desirable to many businesses because it means that the corporation assumes liability for its own obligations, thereby providing protection to the owners, directors, and officers of the corporation from being personally liable for the business's obligations. Another benefit of incorporating is that ownership interests (shares) in the company can be sold to raise capital. However, corporate tax treatment is seen as a major drawback to incorporating by many businesses. Corporate taxation, often called "double taxation," requires that a corporation first file its own tax return and pays taxes on profits before it pays dividends to shareholders. Then shareholders must pay taxes on their dividends on their personal income tax returns. Some tax rules moderate this double taxation effect in some cases. Corporations may range in size from large, publicly held conglomerates to small closely held businesses involving family members as shareholders.
A Limited Liability Company (LLC) combines some liability advantages similar to those of corporations with some "pass-through" tax advantages similar to those of partnerships. However, LLCs must comply with specific legal requirements in order to realize these potential tax and liability advantages.