Business Organization Structures

There are several kinds of business entities you can use when starting a business venture. It is important to consider your personal liability, ease of administration, flexibility for income distributions and tax treatment in making your decision. If you have questions about what type of entity best suits you, give Paul Overson a call.

A sole proprietorship is an unincorporated business owned by you alone and is not ordinarily registered with the state. Sole proprietorships put your home, personal savings and other assets at risk if your business is sued or cannot repay a debt. For this reason, sole proprietorship should be avoided other than perhaps for "hobby" businesses. Some local governments require certain types of businesses to apply for licensing even if they operate as sole proprietorships. Make sure you understand your city's ordinances in this regard.

Partnerships expose you to greater liability than sole proprietorships. In a general partnership, a partner is not only responsible for his/her own actions, but those of his/her partner as well. To avoid this personal responsibility, you should consider filing for status as a limited liability partnership with the secretary of state. Partnerships must also file yearly returns with the IRS to report losses, profits and deductions. Before conducting business, it is important that the partners come to an agreement and put it in writing, outlining how profits, expenses and workload will be divided. Disputes between partners can become costly to resolve and can damage or destroy the business. Setting expectations and obligations early in the process will help avoid disputes.

Corporations, sometimes referred to as C corporations, are independent entities formed and owned by one or more shareholders. Corporations may raise capital by selling stock. Shareholders' personal assets are not at risk for the business's liabilities and debts. A corporation conducts business as a separate entity from its shareholders, pays taxes and distributes profits to shareholders. The shareholders then must pay taxes on the profits received from the corporation, a form of double taxation in that the same income gets taxed at the corporate level and then again at the shareholder level. It is important for a corporation to properly document its corporate formation and later decisions and to maintain thorough corporate records and ensure that the corporation is fully compliant. It is vital for a corporation to consult an accountant or tax attorney regarding its corporate taxes.

S corporations are typically smaller corporations for which shareholders have made the S corporation election with the IRS. S corporation status avoids the double taxation of C corporations by having the corporation file only an informational tax return and all taxes are paid by the shareholders personally. A corporation must meet certain requirements to qualify under subchapter S. The corporation may not:

  • Be a foreign corporation
  • Exceed 100 shareholders
  • Have more than one class of stock
  • Have shareholders who are nonresident aliens, corporations, partnerships or certain types of trusts and estates
  • Be an ineligible business class, which includes insurance companies, certain types of financial institutions and domestic sales corporations working internationally

Limited liability companies (LLCs) offer protection to their members similar to that of an S corporation. As a member of a properly organized LLC, your personal assets are protected from the LLC's liabilities. LLCs require less record-keeping than corporations, and LLCs have more flexibility to make distributions to members other than simply based on ownership percentages. As is true in the case of partnerships, it is important that the members come to an agreement and put it in writing, outlining how profits, expenses and workload will be divided.

Regulations and requirements for your business may vary based on type of industry, as well as state and local laws. No matter what type of entity you are inclined to choose, it is important to seek the advice of an attorney. Call Paul Overson today at 651-209-1155.