Choosing Your Legal Structure

Sole Proprietorship

In a sole proprietorship, you can deduct losses but it does not limit your liability. The sole proprietorship business is owned and operated by one person, but a one person business is not required to be a sole proprietorship. This is the easiest to set up and the most common form. There are no special legal requirements and you can register as a sole proprietorship operating under your own name or under an assumed name.

Under a sole proprietorship, you can lose your personal assets, (home and car, etc.) if you go bankrupt.

Partnership

This is an association of two or more persons who are co-owners of a business for profit and it can take on the different forms of General, Limited, and Silent. Each general partner, is personally responsible for all business-related debts, (including those of their partners). You will need to draw up the partnership agreement, arrange the financial structure, determine the roles and responsibilities of each partner and state the terms for ending the partnership.

Make sure you have buy-out insurance for each partner

Corporation (Closely Held)

This is controlled by the owners and protects the owners from personal liability . It is more complicated to set up, limits your liability and does not allow you to deduct your losses on your personal income tax statement.

You will need incorporation papers and bylaws. Also, make sure the articles of incorporation are tailored to your business. Your will need to learn the reporting requirements, comply with federal, state, and local corporate laws, You will also need to know the tax obligations and how to register your corporation.

S Corporation

An S Corporation gives you the liability protections of a regular corporation and the benefits of deducting your losses on your personal income tax statement. You will need to apply to the Internal Revenue Service and meet their requirements.

It is designed for small start-up businesses and it combines the legal advantages of a corporation with the tax advantages of a partnership. It has similar reporting requirements as a corporation. An S Corporation does not pay income tax. Income and expenses are divided among shareholders who report them on their personal tax returns. An S corporation must comply with Internal Revenue Service requirements. The Internal Revenue Service has strict rules about converting back and forth from a corporation to an S Corporation.

Ask your Lawyer or Accountant if you meet the qualifications for an S Corporation and if the structure will benefit you. They can also help you incorporate your business.

Limited Liability Company (LLC)

The limited liability company provides the tax advantages of a partnership and the limited liability and management flexibility of a corporation, with none of the constraints that currently apply to an S Corporation .This can be a single member or multi-member partnership. It affords limited liability to members, with pass through advantages and income and expenses are divided among the members. It is good for a family business where control over the business is a major concern.