Understanding Business Structures: How To Choose The Right One For Your Venture

Jul 1, 2023

If you’re looking to begin the journey of starting your own business, you have a lot of decisions to make. There are many positive aspects to being a business owner like being your own boss, having a say in the way the business is run, and more. However, this also comes with a heavy load of responsibilities. One of the first major decisions you’ll have to make is the kind of structure you want your business to have. There are 5 major business structures, and each has its own benefits and drawbacks. Ultimately, it will be up to you and your shareholders (if you have them) to analyze the pros and cons, discuss them with your business or corporate attorney, and then make the decision you believe will be the most profitable for your specific business venture. Here’s a more in-depth look at the 5 major structures and what you should know about each.

Sole Proprietorship

What Is It? An unincorporated business with a single owner who pays personal income tax on profits made from the business

Pros: Most of the businesses in the United States are sole proprietorships because of the plentiful tax benefits and lack of government interference. Many individual consultants or contractors choose this structure because there is much less paperwork like federal or state forms required, meaning they can get their business off the ground faster. Sole proprietorships are also very simple to form and dissolve as needed, and can be easily expanded into limited liability entities or corporations.

Cons: Because no separate legal entity is created in a sole proprietorship, the owner of the business is the one who will be inflicted by the liabilities – such as debt – incurred by the business. This could affect your credit and ability to seek capital such as loans.

C Corporation

What Is It? A C corporation (C-corp) structure taxes the owners or shareholders of a company separately.

Pros: With this structure, the personal liability of the business entity is limited, meaning that directors, shareholders, employees, officers, and other stakeholders cannot be affected by any of the legal obligations. It is also possible for the business to obtain significant amounts of capital to fund future projects or expansions by offering shares of stock.

Cons: Because the profits will be taxed at both corporate and personal levels, a “double-tax” situation is created. Shareholders are also unable to deduct business losses on their tax returns. In addition, a C-corp is subject to hefty legal expenses because of costly articles of incorporation and regulatory scrutiny from the federal government.

S Corporation

What Is It? An S-corporation (S-corp) is a structure that is an alternative to an LLC and available only to small businesses with 100 or fewer shareholders who are U.S. citizens.

Pros: Because an S-corp passes its profits and losses directly to the shareholders, it avoids the “double-tax” scenario of a C-corp – otherwise known as “flow-through” taxation. The owners are also allowed to own stock (with exceptions) and have the same level of liability protection as the C-corp.

Cons: Similar to the C-corp, owners of this time of entity have a great deal of federal and state documents to file and maintain. They are also under the microscope of the IRS, and may have their Subchapter S status revoked if they make any moves which are not in compliance, such as mistakes in an election, consent, notification, stock ownership, or filing requirement. Finally, the limits on the nature and number of shareholders might become a roadblock to a company who wants or needs investors in order to keep up with their growth.

Partnership

What Is It? A partnership is the same time of structure as a sole proprietorship, with the only difference being that more than one person can run the company. The assets and liabilities are divided between owners.

Pros: In a partnership, partners can bring their own labor, capital, and expertise together in order to run their business more proficiently. Each of their unique experiences and perspectives bring advantages to the business. Also, the tasks and responsibilities are shared, which allows for a more optimal work-life balance.

Cons: While having more partners may allow for new and varied opinions on the various aspects of the business, it could also open up the door for disagreements if those views do not align. An excessive amount of disagreements could lead to mismanagement, which could be damaging to the future of the company. In addition, the debts and liabilities will be multiplied by however many partners there are.

Limited Liability Company

What Is It? A limited liability company (LLC) combines the elements of a corporation and a partnership.

Pros: It is relatively simple to form an LLC, and the flexible management structure allows either members or managers who aren’t members to run them. Members also enjoy some personal liability protection of a corporation, and if taxed as a partnership, the benefits of flow-through taxation – thus avoiding “double-tax.”

Cons: Many states require an LLC to be dissolved and re-established if a member leaves or dies. In addition, the liability protection is – well, limited. Other steps must be taken to ensure the business is established as a legal entity, or else a lawsuit which targets personal assets could still come to fruition.

How Can A Business Lawyer Help Me Choose Correctly?

An experienced business attorney can help you consider all facets of the components that make up a successful business, such as:

  • Taxes
  • Liability
  • Paperwork
  • Hierarchy
  • Registration
  • Fundraising

The structure you choose will limit your legal options and affect the level of difficulty it takes to own and operate your business. While it may be possible to change the structure of your business in the future, the process can quickly become disorganized and complex, leading to tax consequences and others that could be detrimental to your company.

Trust Zecca Ross & Smith Law Firm P.C. To Help You Feel Empowered By The Structure Of Your Business

We have over 20 years of experience in helping Californians achieve the dream of owning their own business, and we can help you, too. Call today to schedule your free consultation and learn more about our services!

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