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Choosing the Best Business Structure- Part 2

business structure

business structureIn our previous post, Choosing the Best Business Structure, we talked about the importance of choosing the best business structure for your business, and the trouble that can be avoided with proper planning. Here are some of the most common business structures along with things to consider relating to the different structures:

Sole Proprietorship

Tax Considerations (You should discuss your specific tax situation with a tax advisor)

  • Business income and expenses are reported on your personal income tax return.
  • You may also have to pay self- employment taxes and makes quarterly estimated tax payments.

Liability Protection

No protection against liabilities and creditors of the business. If the business is liable or owes the money, you are liable and owe the money.

Other Issues to Consider

  • A benefit is that you have no legal formalities (very low startup costs) to deal with and you are in complete control.
  • Financing and raising capital may be more difficult as financial institutions and investors are less likely to lend to or invest in a sole proprietorship.
  • You may be able to insure against the liabilities of the business with General Umbrella Liability Policy.

Corporation

Tax Considerations

  • In most cases, a corporation pays taxes on its profits and the shareholders pay taxes on the dividends they receive from the corporation (this is often referred to as “double taxation”).
  • Corporations may  retain some of their profits without having to distribute to shareholders.

Liability Protection

  • The shareholders are not liable for the debts or other liabilities of the corporation.

Other Issues to Consider

  • Higher cost to incorporate
  • Legal filings and other formalities that must be complied with
  • Great flexibility in raising capital by issuing and selling shares of common and/or preferred stock
  • No limitation on types of entities that can own stock or number of shareholders

Partnership

Tax Considerations

  • The Partnership does not pay taxes on its profits as the profits are passed through to the partners who then report the profits as income on their individual tax returns.

Liability Protection

There are two types of partnerships:

  • General Partnerships- in which the General Partners are liable for the debts and obligations of the partnership.
  • Limited Partnerships- in which limited partners are not liable for the debts and obligations of the partnership.

Other Issues to Consider

  • There are start-up costs and some legal formalities that must be complied with.
  • It is important to have a good Partnership Agreement to establish the rules governing the partnership as each General Partner may encumber or obligate the partnership.

S Corporation

Tax Considerations

  • Benefits of a corporation without double taxation.
  • The S Corp does not pay taxes on its profits as the profits are passed through to the partners who then report the profits as income on their individual tax returns.

Liability Protection

  • The shareholders are not liable for the debts or other liabilities of the corporation.

Other Issues to Consider

  • There are limitations on the number of shareholders.
  • Shareholders can only be individuals, estates or certain types of trusts.
  • Can only issue common stock.
  • Start-up costs and legal formalities similar to corporations

Sole Proprietorship

Tax Considerations

  • If the LLC has only one owner, there is no requirement for a separate tax return, the owner files the income and expenses on his/her individual tax return. The single owner may also elect to be taxes as an S Corp.
  • If there is more than one owner, the LLC may elect to be taxed as a Corporation (double taxation), S Corp or Partnership (pass through).

Liability Protection

  • The owners (“Members”) are not liable for the debts or other liabilities of the corporation.

Other Issues to Consider

  • There are some start-up costs and legal formalities.
  • Membership interests are issues instead of shares of stock.
  • No limitations on type or number of owners

This article has been prepared for informational purposes only and is not legal advice. Readers should not act upon this information without seeking professional legal advice. The information contained in this web site is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Do not send us confidential information until you speak with one of our attorneys and get authorization to send that information to us.  We do not promise or guarantee that the information is correct, complete or up-to-date, and internet subscribers and online readers should not act based upon this information without seeking professional counsel from an attorney admitted to practice in your location.  This site is regulated by the Arizona Rules of Professional Conduct.  The attorneys at Huber Barney PLLC practice law only in the jurisdictions where they are admitted.

 

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