What is The Best Legal Form for Your Business
Sole Proprietor, Partnership, Corporation, or LLC?
Sep 16, 2009
So now that you have decided to start a business you need to decide the form of business. This is not an easy answer. The form of business will impact the business and you personally. It is best to get input from both your attorney and your accountant who can advise you based on your specific situation. While the rest of this article is not intended to be legal or tax advice, here are some general guidelines to get you started.
The business is important for many reasons:
- it affects you and the business on a state and Federal level
- it affects how the business , and you as the owner, pay taxes
- it has legal implications affecting liability exposure
- it may even impact your ability to get insurance coverage, borrow money, lease space and hire employees
The major forms of business are sole proprietor, partnership, corporation, and limited liability company. All have pros and cons that should be considered in light of your specific needs.
Sole Proprietor
- a single owner of an unincorporated business
- all profits and losses are reported and taxed on the owner’s personal tax return
- liabilities are the responsibility of the owner personally
Partnership
- multiple owners of an unincorporated business
- partners control the business jointly
- files its own tax return, but the profits and losses are taxed on the partners’ personal tax returns
- profits and losses are shared amongst the owners based on their partnership agreement
- each partner individually bears full responsibility for all of the liabilities of the business
Corporation
- a legal entity separate from its owners (stockholders)
- files its own tax returns
- for tax purposes, a corporation may be a C-Corp or an S-Corp. A C-Corp pays its own taxes. An S-Corp is taxed like a partnership.
- provides the stockholders with some protection from the liabilities generated by the business
Limited Liability Company (LLC)
- an LLC is a hybrid of a partnership and a corporation
- ownership percentages, profit and loss distributions and voting powers are determined in an agreement
- files its own tax returns but provides the same tax advantages as a partnership
- like a corporation an LLC provides the owners with some protection from the liabilities generated by the business
While this is a general summary of the basic forms of business, there are others (Limited Partnership, Professional Corporations, etc.) It cannot be emphasized enough that this decision should not be made lightly. What may be right for your friend or neighbor may not be right for you. What may be positive from a tax perspective may be negative from an operations perspective. Consult a trusted professional to help you make the final decision.
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