Being the founder of a new business venture is exciting. Your ideas are new and fresh, you are motivated and energized to see your business grow and thrive. The possibilities are endless, and your potential for success is limitless. But first thing first, you need to decide what type of corporate structure your business is going to be. Choosing the corporate structure that is right for you and your business is an important decision, since the type of business structure you select carries certain tax implications and liabilities.
Types of Business Structures
There are a number of corporate structures that businesses can choose from, and some are more common than others. The most popular corporate structures include:
- Sole Proprietorship. A sole proprietorship is one of the simplest business structures. In order to form a sole proprietorship, founders simply need to commence business operations and engage in business transactions. No special paperwork is required as a sole proprietorship is the presumed default business structure. Any expenses and income from your sole proprietorship are reported on your personal tax filings, but you are also responsible for paying your own self-employment tax. While sole proprietorships are one of the easiest business structures to form, they offer founders little in the way of protections from liability.
- Partnership. Two or more business founders can elect to form a partnership. Partnerships are often a preferred business structure because income is passed through the partnership and on to the individual partners. When founders are considering a partnership business structure, it is recommended that the partners sit down and prepare a detailed partnership agreement defining each founders duties and obligations. The partnership agreement should detail each partner’s role in the business and should lay the groundwork for how the partnership will handle various issues that can arise during the course of doing business.
- General Partnership. The least formal type of partnership is a general partnership. In a general partnership, each partner manages the company and is held personally liable for the obligations of the company. Like a sole proprietorship, no special forms are required in order to form a general partnership. However, just like a sole proprietorship, general partnership business structures do not provide the general partners with any personal protection, meaning that the partners’ assets may be exposed to liability in the event that the general partnership is sued.
- Limited Liability Partnership. A more formal partnership option is the Limited Liability Partnership, or LLP. In order to become an LLP, the partners must file a Certificate of Registration with the New York Department of State in accordance with Section 121-1500(a) of the Partnership Law. In an LLP, partners can either be general partners, or a limited partner. A limited partner is an investment partner only, meaning that the limited partner has no say in how the general partners run the business. As limited partners, these partners are also shielded from liability.
- C-Corporation. A corporation business structure is a business that is its own legal entity that is owned by a group of shareholders. Because the corporation is its own legal entity, it can be sued itself rather than the shareholders being sued. As such, the shareholders are insulated from liability for the actions of the corporation. A certificate of incorporation must be filed with a licensing authority, in accordance with Section 1503 of NY Business Corporation Law. Corporations unfortunately have a drawback when it comes to taxes. Corporations are effectively taxed twice on the income that they generate. The corporation is taxed once on the business’s earnings, and then any earnings that are distributed to the shareholders as dividends are also taxed again at the shareholder’s individual rate.
- S-Corporation. Another corporate structure option is the S-corp. In order to become an S-corp, there are specific requirements that must be satisfied (for example, there can only be a certain number of shareholders) and specific paperwork must be filed. S-corps are often a desirable business structure because of the tax benefits offered by this business structure. Similar to a corporation business structure for all intents and purposes, an S Corporation business structure is slightly different from a corporation business structure in that income and losses from the business are passed through to the shareholders for tax purposes.
- Limited Liability Company. A Limited Liability Company, or LLC, business structure offers similar liability protection as a corporation, without the double taxation of a corporation business structure. Setting up an LLC requires filing articles of organization in accordance with Section 203 of the NY Limited Liability Company Law.
Which Business Structure Is Right For You?
There are a number of business structures to choose from, and each one has its own benefits, legal protections and tax implications. Which business structure is right for you can take some research and analysis, but an experienced business lawyer can help you sort through the pros and cons of each option that is available to you.