What Do I Need to Know About Starting a Business? Part Two: Business Formation

Your choice of business structure can have a profound impact on financial, taxation and liability issues. The principal categories of business structures include:

Sole proprietorship – A sole proprietorship foregoes a lot of the paperwork and expense involved in more complex business structures, but it exacts a price of its own. Since your personal finances and your business finances remain legally linked, you remain personally liable for lawsuits and other financial blows aimed at your business.

Corporation – A corporation is a highly-structured legal entity that protects you and your shareholders from liability. The fact that corporations can sell stock makes them an excellent structure for raising capital. But be aware that corporations are taxed twice – once on corporate profits, and again on shareholder dividends.

Partnership – Partnerships are relatively simple, inexpensive joint-ownership arrangements between two or more business owners. While you’re still personally liable for debts and other business headaches, all your partners share that liability with you – but this also ensures that each partner is highly motivated to contribute to your company’s success.

LLC – An LLC (limited liability company) treads the middle ground between the simplicity or partnership and the added protections of a corporation. Since an LLC technically isn’t a taxable business entity, the taxes are “passed through” to the members for filing on their own personal returns. One downside is the requirement to pay self-employment tax as well.

S-Corp – S-Corps are corporations that aren’t double-taxed, with the taxes passing down to shareholders who must pay themselves reasonable wages. Income other than wages go to the owner as distributions.

Cooperative – Cooperatives are made up of user-owners who pay federal taxes as well as personal income taxes, while the entities themselves are treated as “pass-through” corporations.

Take steps to make wise choices about your business formation. Contact our law firm for a consultation so we can answer any questions you may have.