Business Formation and Choosing the Structure of Your Business
Choosing a structure for your business is one of the most important things you will do when you are making plans to start a new company. Business formation attorneys can help you to understand the benefits and limitations of each type of business structure, and to settle on a business formation that best meets your needs. Generally speaking, sole proprietorships and partnerships are among the simplest types of business structures, while limited liability companies (LLCs) and corporations are often more complex. Sole proprietorships are businesses that are owned by just a single individual, and the business and the owner are the same entity for tax and liability purposes. Partnerships are business structures that are often best for two or more people who want a relatively simple structure. LLCs and corporations provide varying levels of protection from personal liability. Choosing between a corporation and an LLC is something you should only do in consultation with a business formation lawyer.
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Areas of Business Formation
There are two types of corporations — C corps and S corps — and you should discuss the benefits and limitations of each with a business formation attorney so you can pick the one that best fits your business needs. Corporations provide the greatest amount of protection from personal liability for the owners. However, that level of protection from personal liability comes with other limitations. The cost of forming a corporation tends to be much higher than the cost of forming other types of business structures, and corporations require in-depth record-keeping procedures, SEC reporting, and other processes. Unlike other types of business structures, corporations are separate entities that are entirely distinct from owners or shareholders.
Limited liability companies allow business owners to have elements of both corporations and partnerships in their business structure. Owners of LLCs largely have protection from personal liability in the event the business goes bankrupt or faces lawsuits, yet LLC members are required to make contributions to Medicare and Social Security through self-employment taxes. Accordingly, LLCs are not entities that are entirely distinct from their business owners, as corporations are. Profits and losses from LLCs also get passed through to each member’s personal income. As such, the business does not have to pay corporate taxes, but its members are responsible for paying taxes on the earnings of the LLC.