Where do you start when forming a business? The legal formation of a business is a necessary step in starting a business. The business formation will determine liability, taxes and how the company is run. Setting up a business involves risks, but some risks can be mitigated depending on the structure of how the business is formed. The formation of a business entity will benefit from the help of a trained lawyer. Each type of legal structure has its own benefits and drawbacks. The most common types of businesses are:
Sole Proprietorship- a simple business run by one owner in their name. Most states do not require special legal formation for sole proprietorships. The benefit is the simple nature of formation and simple taxes. All sole proprietorship taxes are reported via the owner’s personal income tax return. The drawback of a sole proprietorship is it does not offer any legal protection for the owner. (IRS definition of Sole Proprietorship)
Partnership- when two or more people form a business. The business structure can vary within partnerships. The most common partnerships are general partnerships, limited liability partnerships and limited partnerships. Most states will require a partnership registration with its state business office. The documents required for a partnership include a partnership agreement which specifies how the business will be run, who will front the money, how profits are determined, and how the partnership can be dissolved. (IRS definition of Partnership)
Corporation- This structure provides liability protection for all shareholders. The most common forms of corporations are S-Corporations and C-Corporations. An S-Corporation will allow the income of the corporation to pass-through to the individual owners’ tax returns. C-Corporations are usually seen among larger businesses with multiple employees and taxed as independent entities. Essentially, a C-Corporation is taxed twice- once to the corporation on the profits when earned and once to the shareholders on dividends when earned. (IRS definition of Corporation)
LLC- This option is similar to a corporation in terms of liability, but can have different tax procedures. Owners of an LLC are called members, and there is no limit on the number of members. A single-owned LLC may file their taxes on their personal income tax return. An LLC may opt for S-Corporation status for tax purposes. (IRS Definition of LLC)
All of this information is confusing and overwhelming. It’s best to talk to an attorney who understands your structure in order to maximize profits and minimize liability. At Alison Mathey Lambeth Law, our services include consulting on business formations, drafting bylaws, drafting articles of incorporation, drafting partnership agreements, recording minutes, EIN application assistance, obtaining a corporate seals and stock, serving as a registered agent, and filing the necessary paperwork to ensure state compliance with your business entity.
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