The other day I was having a heated discussion with someone about what type of business they should start.
By “type of business,” I don’t mean what products they should sell or whether they should be a manufacturing or service company. No, we were debating which legal form their business should take.
Three things to keep in mind when choosing a legal form are:
1. Liability: Legally, corporations (and limited liability companies – or LLCs) are individual entities. As such, the corporation – not individual shareholders – are responsible for the actions of the business.
2. Double taxation: No one likes paying taxes even once, so you certainly don’t like paying taxes twice – once on income for the business and then again when that income is distributed as profits to you.
3. Ownership: Certain legal business forms limit the number or type of people who can invest in your company.
It’s always best to sit down with an attorney – and possibly an accountant — and discuss the best corporate structure for your specific business and circumstance. And state corporation laws differ.
When you do meet with an attorney, these are the legal structures you’ll consider:
• Sole Proprietorship: A business owned by one person with no formal legal structure.
• Partnership: A business with more than one owner who actively engages in the management of the company.
• Limited Liability Company (LLC): A legal form providing liability for company’s owners without incorporation.
• “S” Corporation: A type of corporation provides personal liability protection for owners with pass-through taxation (rather than double taxation).
• “C” Corporation: A corporate form that allows for the most investors (including foreign investors) and significant liability protection.
Photo by MSDesigns.
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