Where Do You Start When Forming a Business?
The legal formation of a business is one of the most important first steps when starting a new venture. The structure you choose will determine how the business is taxed, how it is managed, and the extent of your personal liability. While starting a business always involves risk, the right legal structure can help mitigate many of those risks. An experienced attorney can guide you through the process to ensure your business is set up correctly from the start.
Each type of legal structure has unique advantages and drawbacks. The most common types include:
Sole Proprietorship – A simple business owned and operated by one individual in their own name. Most states do not require any special legal filing to establish a sole proprietorship. Benefits include ease of formation and straightforward tax reporting, since all income and expenses are filed on the owner’s personal tax return. The drawback is that the owner receives no legal protection from business liabilities. (IRS definition of Sole Proprietorship)
Partnership – A business formed by two or more people. Partnerships can take different forms, the most common being general partnerships (GPs), limited partnerships (LPs), and limited liability partnerships (LLPs). In most states, a partnership must be registered with the state’s business office. A written partnership agreement is strongly recommended to outline how the business will operate, including each partner’s financial contributions, how profits and losses will be shared, management responsibilities, and the process for dissolving the partnership. While partnerships are relatively straightforward to form, liability protection depends on the type of partnership chosen. (IRS definition of Partnership)
Corporation – A corporation is a separate legal entity that provides liability protection for its shareholders. The two most common types are S corporations and C corporations.(IRS definition of Corporation)
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S Corporation – Allows business income, losses, deductions, and credits to “pass through” to shareholders, who report them on their individual tax returns. This structure avoids double taxation and is often preferred by small to medium-sized businesses that qualify.
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C Corporation – Treated as an independent taxable entity. Profits are taxed at the corporate level, and dividends are taxed again when distributed to shareholders, resulting in “double taxation.” However, C corporations can offer greater flexibility in raising capital and are often used by larger businesses with multiple employees.
LLC – This business structure provides liability protection similar to a corporation but offers more flexibility in tax treatment. Owners of an LLC are called members, and there is no limit on the number of members. A single-member LLC may report its income on the owner’s personal tax return. Additionally, an LLC may elect to be treated as an S-Corporation for tax purposes if desired.(IRS Definition of LLC)
All of this information can be confusing and overwhelming. It’s best to consult an attorney who understands your specific business structure to help maximize profits and minimize liability. At Alison Mathey Lambeth Law, our services include consulting on business formations, drafting bylaws and articles of incorporation, operating agreements, preparing partnership agreements, recording corporate minutes, assisting with EIN applications, setting up corporate stock, serving as a registered agent, and filing all necessary paperwork to ensure your business remains compliant with state requirements..
Contact us to set up your initial consultation!
