Determining The Appropriate Business Structure
Aside from the initial idea for a business, determining which structure is right for the company is one of the most important decisions to make. No single approach is appropriate for every company. Factors to consider include the product or service the company provides, the type of financing the company needs and tax implications for the business and ownership. While discussions with a business formations attorney is advisable when creating a new business, a basic understanding of the benefits and disadvantages of various structures is a good starting point for those contemplating a new business enterprise.
Limited Liability Company
A limited liability company (LLC) is an increasingly common form of business entity. An LLC can be formed by one or more persons. State statutes vary, but generally an LLC can be formed for any lawful purpose by filing articles of organization with the secretary of state for that jurisdiction. Each year after, the LLC is required to file annual registration statements with the secretary of state’s office as well.
One of the biggest benefits to forming an LLC is the limited personal liability protection that it offers. This means debts, obligations and liabilities of the LLC are not passed through to the ownership’s personal assets. In addition, an LLC owes no federal tax on income, although state laws can vary on taxing income earned by the LLC.
Incorporation
Corporations offer a more formalized business structure, but can be more expensive and complicated to set up and maintain. There are also specific reporting obligations and annual meetings that are generally required for corporations. But for those businesses looking to attract investors outside of the company, a corporation can be an ideal entity, as shares of the company can be issued and sold.
While incorporating is great tool for raising capital, a common reason for avoiding incorporation is for tax purposes. Income earned by the corporation itself is taxed, as is personal income for the owners of the company. This “double taxation” makes incorporating unattractive to many who do not need to sell shares.
Other Business Structures
Sole proprietorships and partnerships are also popular types of business entities and are the “default” structures for those who do not file articles with the state. While generally easy and inexpensive to create, they can open owners up to personal liability for business debt.
Partnerships exist when two or more persons contribute to a trade or business. Some partnerships have general partners who may be personally liable to creditors, and limited partners, who may not. Partners also owe fiduciary duties toward one another, meaning each must act in the other’s best interest when conducting business.
No matter which business formation is right for you and your company, there are numerous tax, contractual and other obligations to consider when forming a business. It is also important to remember that as businesses grow, the structure may need to evolve with it. As these issues can be complex, it is important to discuss these issues with an experienced attorney.