Business Law Advisor

[#1]

Starting a business involves many critical decisions before hiring your first employee or planning a Grand Opening event.  After reading articles and talking with other business owners you may be aware of important decisions to consider for your business like how to finance, which licenses and permits apply to you, and how do you plan to comply with labor and employment laws.  These issues are all very important but there is another decision you must make.  You must decide whether your new business will be a sole proprietorship, partnership, corporation, or limited liability company (LLC).

Business owners must choose the structure that aligns with their business needs.  Choosing which of these structures is right for your new business will depend on several factors. Among these factors are potential risks and liabilities, your tax and investment requirements, and any expenses that are associated with each legal structure.

How your Business Structure Impacts your Risks and Liabilities

When something unexpected happens on the job who is responsible for the damages?  Some structures will limit liability to the business while others structures will additionally make the owner personally liable for the damages and debts incurred by the business.  It’s a good idea to be cautiously aware of this before filing for a specific structure, especially if your business carries more liability risk.    

Understanding how your Small Business will be Taxed

Both business owners and non-business owners must pay federal taxes but if you are the owner of a C-Corporation be prepared to pay federal taxes twice.  While most of the legal structures are “pass-through” entities where the income and losses are actually passed through from the business to the individual for tax purposes, The C-Corporation is required to pay taxes on its income as a business entity and the business owner/shareholder pays taxes on earnings and dividends that are received as an individual – thus the double taxation.

Similar to federal taxes, some states have also begun to impose taxes on the business entity itself. This is becoming a bigger issue for limited liability companies.  Before making your final decision on a legal structure you should check with your state to determine if it will tax your business entity.

Small Business Investment Options and Requirements

Unlike other business forms, the corporate structure allows a business to sell ownership shares in the company through its stock offerings.  By issuing employee stock options it is easier to attract investment capital and to hire and retain key employees.

But for businesses that do not anticipate the need to issue stock options and will never "go public," forming a corporation probably isn't worth the expense. If you are attracted to limited liability, an LLC provides the same protection as a corporation, but the ease and flexibility of LLCs offer an advantage over corporations.

Consider Administrative Costs and Expenses

Administrative costs for filing can vary between structures and while taxes and liability are more important overall, administrative costs should be examined as well.  The costs and burden of both money and time can take a toll on a new business owner especially when you have fewer resources.  

Examples of these expenses and added costs include tax-filing requirements, complexity of business legal documents with appropriate agencies, and federal, state, and local laws dictating other necessary actions of the business.  Consult with an attorney for specific guidelines and estimates for the administrative work required in your state.

Comparison of Small Business Legal Business Structures

Sole Proprietorship -

• Offers full liability
• Pass through taxes
• Minimal costs and administrative fees
• Most sole-proprietorships do not anticipate having public investment needs
• It is recommended for small start-up companies with one owner.

Partnership -

• Offers full liability
• Pass through taxes
• Minimal costs and administrative fees
• Most small partnerships do not anticipate having public investment needs.
• It is recommended for small start-up companies with two or more owners.

Limited Liability Partnership - 

• Offers full liability for general partners and limited liability for limited partners 
• Pass through taxes
• Moderate costs and administrative fees
• Businesses under this structure generally have minimal public investment needs. 
• It is recommended for companies participating in physical or risky investment activities with two or more owners.

C - Corporation -

• Limited liability
• Double taxation
• Most costly administrative fees
• Business plans to offer stock options
• Recommended for more established companies with many employees

S - Corporation - 

• Limited liability
• Pass through taxes
• Slightly less costly than C-Corporation
• Business plans to offer stock options
• Recommended for more established complanies that plan to have no more than 75 shareholders.

Limited Liability Company (LLC) -

• Limited liability
• Pass-through taxes
• Slightly less costly than C-Corporation
• Business plans to offer stock options
• Recommended for companies with at least two owners and participating in physical or risky investment activities.

Changing your Business Structure

Although careful consideration should be taken to make an informed decision, your initial choice of a business structure is not necessarily final.  For example, your business can begin as a sole proprietorship or partnership and when your business grows or your situation changes you can file your business as an LLC or a corporation.

Additional Small Business Resources

Visit these websites for additional information on legal structures and to help you decide which is best for your business.

• Business.gov – Provides additional small business resources to help you determine the structure for your business.  Also provides legal requirements for your state.

• IRS.gov – Provides tax information for corporations
  
  
  
• Business FAQs – includes answers to questions about partnerships and taxes for business structures.
  
  

Message Edited by CharlotteW on 04-28-2009 09:11 AM

Message Edited by CharlotteW on 04-28-2009 09:12 AM

Message Edited by CharlotteW on 04-30-2009 02:20 PM

[#2]

I have a question regarding to this article: if a wife and a husband form a LLC elected S corp as taxation purpose with husband own 98% share and wife own 2% share, can the LLC apply the full fringe benefit deduction for the wife (like C corp could) since she owns only 2% share without being taged a Personal Service Corp (PSC) which has to pay a flat 35% income tax?

[#3]

Excellent breakdown guys. I know in the past I always struggled with the differences between different business structures..

Tyler Gheller

Los Angeles Lawyers & Attorneys

Message Edited by NicoleD on 09-30-2009 12:13 PM