Let’s Get in Formation
Entrepreneurship is a thrilling and challenging journey, and though many people have excellent ideas for startups and new ventures, knowing where to start can be overwhelming and choosing an ineffective structure can cost you in the long run.
One of the first steps in forming a business is knowing what kind of structure to use. There are four basic ways to structure your business, each with its own advantages and disadvantages.
Limited Liability Company and Limited Liability Partnership
Limited Liability Company is most commonly known as an LLC. An LLC is a popular choice for many entrepreneurs because this type of formation limits your personal liability for business debts. An LLC can be owned by a single person (single member LLC), multiple people, or companies. The owners, which must include a registered agent, are called members. An LLC provides liability protection for all its owners and is very easy to set up. However, some of the disadvantages of an LLC include annual filing fees, additional state filings depending on your state, and an inability to issue stock whether privately or publicly.
Similar to the LLC is a structure called an LLP, or Limited Liability Partnership. These types of businesses require a partnership agreement and are many times used by attorneys and accountants. Like an LLC, the partners in an LLP have limited liability for debts and are easy to form. An LLP can have unlimited partners, but it’s important to understand that partners must have an active role in the company. Disadvantages to this business structure include an inability to issue stock and the fact that all partners are personally liable for any malpractice claims against the company.
Sole Proprietorship and Corporations
Another type of company formation is a sole proprietorship. With this company structure, the company and the owner of the company are considered the same person for legal and tax purposes. The owner assumes liability for the business and is responsible for all business debts. This business is the easiest to form and doesn’t require any special reporting with the state. Sole Proprietorships, however, commonly have a short lifespan and raising money for the business is difficult.
Companies can also be formed as a corporation. A corporation limits personal liability for the owners and has two ways to be taxed. Large companies and startups using venture capital are most often formed and taxed as a C Corporation (C-Corp) while smaller companies file as S Corporations (S-Corp), which offers pass-through taxation.
Corporations provide owner protections from liability and can have an unlimited number of shareholders, but corporations are more expensive and complicated to set up and may be subject to double taxation.
Sound complicated? Not sure which structure is right for you and your business?
You’re not alone. Many people consult an attorney when forming their business to learn more about the different formation types, the various tax requirements, and the legal ramifications of starting and maintaining a business.
