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Corporate Structure

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choosing company structureOne of the first decisions you must make as a business owner is about your corporate structure. The process of choosing a legal structure is not one that should be taken lightly. This is due to the fact that the structure an owner chooses will impact how much they will be taxed, how much liability the owner will have personally, as well as how much control and authority they will maintain over operations. There are 4 major types of legal entity structures for prospective owners to choose from. Each carries its own benefits depending on how an owner would prefer to run their business.

Sole Proprietor
Limited Liability Company (LLC)
Partnership
Corporations

Sole Proprietor

A sole proprietorship is the simplest form under which one can operate a business. A sole proprietorship is not a legal entity. Essentially, it is a business operated and owned by the same individual. For the owner, the business is not taxed separately—and all income generated from the business flows directly to the owner. Aside from obtaining the necessary permits and licenses, a sole proprietorship is a low cost and simpler than most other structures.

Partnership

If there is two or more owners in a business, a partnership provides a simpler option for business structure. There are three most common types of partnership structures available for owners— General Partnerships, Limited Partnerships (LP) and Limited Liability Partnerships (LLP).

    • General Partnership: A general partnership is a business agreement made between two or more individuals who agree to share all assets, profits and liabilities of the business.
    • Limited Partnership: With this structure, only one general partner has unlimited liability, and the remaining partners only possess limited liability. Those with limited liability generally have more limitations in regards to control within the company. The partner with unlimited liability must pay self-employment taxes.
    • Limited Liability Partnership: The limited liability partnership differs from the limited partnership in that every partner has limited liability. This structure ensures that partners will not be responsible for other partner’s actions and debts.

Limited Liability Company (LLC)

The Limited Liability Company structure allows owners to reap the benefits of corporation and partnership business structures. In the event of bankruptcy or lawsuits, an owner’s personal assets are protected. Businesses with an LLC structure have owners who are considered self-employed. Profits and losses are passed to personal income and do not have to face corporate taxes. This structure is well-suited for businesses that fall on the medium-to-high side of risk, to as to keep the owner’s personal assets safe.

Corporations (S-Corp, C-Corp)

Corporations come in two separate categories, S-Corporations and C-Corporations.

    • C-Corp: For the strongest protection for owners in regards to personal liability, a C-Corp is ideal. This legal identity is entirely separate from the owners themselves. These corporations pay taxes, such as income tax on the profits they make. The C-Corporation structure can be taxed twice on its profits—once when the profit is made, and then when the shareholder dividends are paid on personal tax returns.
    • S-Corp: S-Corps on the other hand, are designed for the corporation to avoid this double taxation. This type permits profits as well as some losses to be passed to the owners without being subjected to corporate tax rates. There are, however, limits. S-corporations cannot exceed more than 100 shareholders, and each shareholder must have United States citizenship.
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