If you are starting a new business or have a current business that is growing or adding ownership interests, then you may be concerned about which business structure that you should use. Changing a business structure is always possible, but it is best to take the time to select the optimal type from the beginning to avoid the cost and complexity of making a change later. Your choice of a business form will depend on several factors, including the number of owners, type of business, family involvement and tax situation. Here is an overview of the most common business legal structures:
Sole Proprietorship Just like it sounds, a sole proprietorship is for solo business owners and is the simplest form to use. Profits are taxed using personal income rates, and no special documents are required. If you have using business name, you may need to file appropriate documents to use that business name. If you are starting out as a sole owner, this is probably the best choice even if you have employees.
General Partnership A general partnership is a business form with two or more partners, all with ownership interests and who are active in the business. Like sole proprietorships, a general partners’ shares of profits are taxed individually. It does require a partnership agreement to spell out the percentage of ownership for each partner, as well as other terms of management and responsibility.
Limited Partnership A limited partnership is a bit more complex and will involve limited partners who invest in the business but are not active in operations. This form will also require a limited partnership agreement that includes all general partners and limited partners.
Limited Liability Company (LLC) The LLC is a flexible and popular business form that has the advantages of a general partnership while offering some protection from liability for LLC members, similar to a corporation. LLC documents will detail the membership and operating agreement, but does not require the articles, bylaws and administrative work of a corporation.
Corporation The traditional ‘S’ or ‘C’ corporate form is still appropriate for some types of businesses, where there are shareholders as either investors or active owners. S corporations use ‘pass-through’ treatment of income like a partnership, while C corporations use a lower, fixed tax rate of 21% under the new tax reform bill.
Any corporation will require Articles of Incorporation and Bylaws, as well as regular shareholder meetings and minutes to meet corporate requirements.
Where to Begin? All of these business forms can be most easily created with the use of an attorney to draft the required documents, based on an evaluation of the best structure, tax advantages and operational ease. Then, as you move forward your attorney can serve as ongoing counsel as ownership changes, shares increase, or other adjustments are needed to the original agreements. If you have any questions, please call the attorneys at Shoup Legal.