Starting a small business can be intimidating, and choosing the right corporate structure for your business can be the most confusing part. Here, we have de-mystified the basics of the four most common corporate structure types.
Sole Proprietorships
When you own a sole proprietorship, all profits and losses pass through to your personal tax returns. This is one of the most frequently-used types of corporate structure for small businesses.
If you will be performing most or all the work yourself, you may wish to do business as a sole proprietorship. No legal formation is necessary, but you may need certain licensing or insurance. Also, if you plan to do business under a name that isn’t your own, you will need to register a “Doing Business As” (DBA) name with your state’s corporation commission.
Partnerships
A partnership is like two sole proprietors that wish to work together as one business. Like sole proprietorships, partnerships are pass-through entities for tax purposes.
You can form a general or limited partnership or a joint venture. In a general and joint venture, everything is split equally, except joint ventures only last a set amount of time. Limited partnerships are just that – limited. One partner has more responsibility, as well as more of the profit and loss, than the other one.
Formation, licensing, and insurance considerations are the same as with a sole proprietorship. With a partnership, though, it is highly recommended that you draw up a partnership agreement to head off any misunderstandings.
Limited Liability Corporations (LLCs)
If you have significant assets or go into business in an industry where lawsuits occur frequently, you may wish to form a limited liability corporation (LLC). Although still as pass-through tax entity, you will only be taxed on your share of profits, and your assets will be shielded in case of business misfortune.
To form an LLC, you will need to file articles of organization and a unique business name with your state’s corporation commission. This can usually be filed through each state corporation commission’s website. You will also need to draw up an operating agreement and obtain any relevant licensing, insurance, or permits, and register a DBA name if you plan on doing business under any name but the LLC name.
Corporations
If you are working with more than just a few others and wish to distribute shares, then a corporate tax structure may be the right business formation for you. Outside investors and banks tend to prefer corporate structures, as well. The corporation will be its own separate legal entity.
Forming a corporation is not much different than forming an LLC, and most secretary of state websites will walk you through the process. You will need to register a unique business name, file articles of incorporation, and apply for an Employer Identification Number (EIN), also called a Federal Tax Identification Number (TIN).
Corporations can be c-corps, s-corps, or b-corps. The most commonly formed type of corporation is the c-corp, and the other two types are very similar.
All shareholders in a c-corp combine their funds to form the business and then are issued stocks. Since a c-corp is a separate entity, shareholders are taxed as well as the corporation, sometimes called “double taxation”. A good tax preparer should be able to minimize tax burdens for both shareholders and the company, though.
S-corps are like c-corps but with pass-through status on taxes. Some people prefer this to avoid the so-called “double-taxation” issue. B-corps are simply c-corps with a cause and sometimes enjoy special tax benefits due to being tied to a cause.
Nonprofit Corporate Structure
If you plan to funnel revenue exclusively to a social cause, you will want to form a nonprofit organization. This tax-exempt business structure is perfect for literary, religious, scientific, or charitable ventures.
You form a nonprofit the same way you form a corporation, except you will need to file with the federal and state government, through the Internal Revenue Service (IRS), for tax-exempt status.
Conclusion
Choosing the right corporate structure can make a big difference at tax time and in legal situations. Call Bull Market Capital Lending for more information on choosing the right corporate structure for your new business!