When you’re preparing to start a new business, one of the first things to consider is how to structure your business. Whether you choose to incorporate as a C-Corp, an S-Corp, a Limited Liability Company (LLC) or simply begin selling your product or service as a Sole Proprietor, your choice should not be taken lightly. The way you structure your business can have a big impact on your future success. Some of the advantages and drawbacks of the most common business structures are as follows.
| Business Structure | Unique Features | Protections & Taxation | Possible Drawbacks |
|---|---|---|---|
| Sole Proprietorship | A sole proprietorship is the easiest and least expensive business structure to start and maintain. All a person needs to do to become a sole proprietor of a small business is to sell a product or service.
Sole proprietors do not have to issue stock and as the sole owner of the business, you are the sole decision maker. You have flexibility to run the business the way you want to run it with no need for a board of directors to oversee your operation. |
Because sole proprietorships are not viewed as a separate tax entity, taxes are filed using the same 1040 form you currently file as an individual. | The most important concerns of sole proprietors involve liability and the ability to secure funding in the future. As a sole proprietor, you operate without any legal separation from the business, leaving yourself liable for any debts and legal claims against the business. Also, because a sole proprietorship is not a separate legal entity, lenders may be reluctant to provide financing and may require that a personal asset be used as collateral.
While many sole proprietors choose to operate under their name, some prefer to register a “doing business as” or DBA name which may require filing a form and paying a state or county registration fee. While use of a DBA doesn’t create legal separation, it may be more helpful from a branding perspective. |
| Limited Liability Company (LLC) | Forming an LLC is easier than other forms of incorporation, while giving the owners of the business legal protection of personal assets. There is no limit to the number of owners an LLC can have and no requirement for stock issuance or a board of directors. | Owners of an LLC are not liable for business liabilities and income generated by the business passes through to the owners to file on their personal tax returns. | While government regulations are not burdensome, LLCs are required to submit ongoing governmental filings and cannot go public. |
| S-Corporation | Small businesses are often formed as S-Corps because of the flexibility the structure provides. Combining features of LLCs and C-Corps, an S-Corp can have up to 100 owners with a requirement to pay themselves a reasonable wage. S-Corps issue common stock, however corporations and partnerships cannot be shareholders. | Owners are not personally liable for corporate debts or legal claims against the business and like an LLC, S-Corp status provides for pass-through taxation, meaning that profits are passed through to shareholders and taxed as personal income. | S-Corps are subject to slightly greater governmental scrutiny than LLCs, including more administrative record keeping and oversight of management by a required board of directors. Ongoing compliance filings are required, and all owners must meet all IRS requirements as U.S. citizens. |
| C-Corporation | Like LLCs and S-Corps, C-Corporations are legally separate from their owners, meaning that personal assets are more likely safe from business creditors and lawsuits against the corporation.
C-Corps also have more options when it comes to raising money. They can issue preferred shares to owners and common shares to an unlimited number of investors or employees. Lenders are typically more inclined to finance businesses with a well-established legal history. Businesses using this structure are also able to accumulate cash reserves. Once income taxes are paid on taxable profits, remaining cash profits can be kept in the business to fund future growth and expansion. |
Owners and shareholders of a C-Corporation are not held personally liable for corporate debts or legal claims against the business. While this structure is preferred by businesses that aspire to go public or be recognized internationally, the government places more restrictions on C-Corporations. If a C-Corp issues dividends, the funds issued to shareholders get taxed at the corporate level and then a second time when the shareholder reports the income as earn dividends. | C-Corporations are subject to more regulatory requirements, including a board of directors, board meetings, annual report filings and more administrative record keeping needed to comply with state and federal authorities.
As a small business owner, the business structure you select will impact your personal liability, legal rights and future tax obligations. Whether you’re starting a new start-up or an established business looking to expand, merge or acquire another business, the attorneys at Regan Law have extensive knowledge and experience in helping clients understand the legal aspects of business formation, structure, maintenance and compliance. |
Should you have questions or need more information on formation and structure of your business, please reach out to us at Regan Law, LLC.
