One of the most important steps you can take when entering a new venture is choosing a structure for your business start-up. The structure you choose for your business impacts numerous legal and operating aspects of the company, yourself, and other investors or partners. Here are several issues to consider when choosing a business entity and the pros and cons of the most common business structures.
Questions to Consider When Choosing a Business Entity
Your responses to the following questions can help you choose the best business entity and structure for your start-up:
- What level of personal liability protection do you need or desire? Some business structures provide a higher level of protection for personal liability compared to other structures.
- How will you raise capital for your business? What are your financing needs for the future? If you intend to offer an interest in your business in exchange for capital or you need to secure financing, you may want to consider a more formal business structure that allows for shareholders and allows you to borrow money in the business name without a personal guarantee.
- How do you want to structure tax payments? Some business entities are pass-through entities that are not taxed on the income generated from the business. The net income for the business is “passed through” to the owners to be taxed on the owners’ personal tax returns. On the other hand, some business entities must pay taxes on profits, and the owners or shareholders also pay taxes on any amounts they receive from the business.
- What level of administrative and organizational complexity are you comfortable with for your company? The business entity and structure you choose may require a higher degree of business formalities and government filings to maintain the benefits received by choosing the business structure.
What are the Common Business Structures Used for Start-Ups?
There are four common business structures that many entrepreneurs use to set up a new company.
A sole proprietorship is the simplest business structure you can choose for your start-up. It does not require any special filings with the government. You choose how to operate your business, and you report the net profits for the business on your personal income tax return. However, a sole proprietorship does not allow for partners or other investors. You own 100 percent of the business. Also, you are personally responsible for all debts and liabilities of the business.
A partnership can be used to form a business when two or more individuals agree to share in the profits and losses of the business. A partnership tax return is required. Partnership agreements can be tailored to the needs and desires of the partners and even provide limited liability for the partners. However, even though partnerships are the simplest business structure for companies with two or more owners, partnerships do not provide the level of protection obtained by a corporation.
Corporations are legal entities that are separate and apart from the owners. A corporation is required to file tax returns and pay corporate taxes on profits unless the company elects to be an S-corporation. However, shareholders are protected from personal liability for the debts of the company. You will incur more cost in forming a corporation, and corporations have strict and extensive operational, reporting, and record-keeping requirements.
Limited Liability Company (LLC)
An LLC takes advantage of the benefits of a corporation and a partnership without all the formalities of a traditional corporation. LLCs provide personal liability protection while allowing for multiple owners. LLCs are organized under state law, so the laws applicable to LLCs can vary slightly by state.
Consult a Mentor, Ohio Business Law Attorney for Help in Forming Your Business Start-Up
Choosing an entity and structure for your company impacts everything from your daily operations to taxes, personal liability, and funding. It can be helpful to have legal advice, guidance, and support from an attorney who understands the laws and regulations governing various business entities in Ohio.
Call Moseman Law at (440) 255-0832 or complete the contact form on our website to request additional information or a consultation.