The decision to start a business is one that opens the door for a host of other decisions a budding business owner must make, the first of which is what legal structure to chose. Each business structure presents unique benefits and costs, and someone who has not owned a business before will likely not be familiar with these differences. Thus, choosing a business structure should be done with the aid of an experienced West Palm Beach business attorney. Nonetheless, it is best for business owners to have a general understanding of the business formation options available, so our team has provided a brief overview.
Types of Business Structures
There are four core business structures for United States companies: corporations, LLCs, partnerships, and sole proprietorships.
- C Corporation: Entity that is legally considered separate from their owners.
- S Corporation: Entity with owners who are all U.S. residents and 100 shareholders or less that have the benefits of incorporation, but are taxed as a partnership.
- Limited Liability Company (LLC): Entity where members of the company (including owners) are not held personally liable for company’s debts or liabilities.
- Partnership: Arrangement between two or more individual owners in which they share profits and liabilities of the business.
- Sole Proprietorship: A business entity that is not incorporated and has one owner who pays personal income tax on the business’s profits.
Key Considerations for Prospective Business Owners
When selecting a business structure, there are many financial and legal factors which must be taken into account, the most important being liability and taxation.
Owners of partnerships or sole proprietorships are not afforded personal liability protection. For example, if the business is sued or cannot pay its debts, then the owner’s personal assets could be attached to settle business debts and claims. For owners who want to shield their personal assets (especially those in high-risk fields that are susceptible to lawsuits) setting up a corporation or LLC may be the better option.
Tax regulations for owners of sole proprietorships, partnerships, LLCs, and S corporations are virtually identical in nature. These are considered “pass-through” entities, which means a business’s profits and losses pass to the owners, who then report the profits they shared or deduct that amount on their personal income tax return. Owners of these types of businesses must pay income taxes on all net profits, regardless of how much they actually take out of the business each year. The tax benefits of the various structures will depend on the owners’ individual circumstances.
Owners of a C corporations will be doubly taxed. First, the corporation itself pays taxes on the company’s profits. Then owners must pay taxes on salaries, bonuses, and dividends. These two levels of taxation, sometimes called “double taxation,” can add more complexity to filing. However, since corporations enjoy special corporate tax rates that are sometimes lower than those for individuals, this may not end up being an issue.
If you have an interest in starting a business, an experienced West Palm Beach business attorney at Kelley & Fulton can help you with every aspect of the complex process. Call us today for a free consultation.