One of the most important choices you will make when starting a business is choosing a legal structure. The business formation you choose will determine the personal liability of the founders, how taxes are paid, and more. Our Rockford business law attorneys explain what you should consider when choosing a legal structure for your company.
Different Types of Business Entities
Business formation is an essential part of starting a business. Below are the main business legal structures available for your business:
- Sole Proprietorship
- Limited Liability Company (LLC)
Business Entities You Should Consider
A sole proprietorship is possibly the simplest legal structure available and the most obvious choice for many small businesses. However, this option lacks many legal and financial protections that other business entities offer. With a sole proprietorship, the business owner and the business have a shared entity. This means that the owner is personally liable for any debts, judgments, or other liabilities. The owner must also pay personal income taxes for all net business profits.
Limited Liability Partnerships
Limited liability partnerships are a great business entity for partners who only want to be liable for their total amount of investments in the business. It is also favorable for many since a partner can leave the business without dissolving the limited liability. This wouldn’t be possible with a general partnership.
An S corporation is a favored business entity of many companies. An S corporation is a type of corporation that meets specific Internal Revenue Code requirements. The requirements give a corporation with 100 shareholders or less the benefit of incorporation while being taxed as a partnership. The corporation may pass income directly to shareholders and avoid double taxation. This type of business structure can help businesses limit tax liability in years to come. However, the application process is more complicated and costly compared to others.