Business formation is a necessary early step of starting a business, whether you’re registering a simple DBA, incorporating or forming a partnership. Which legal structure is best for your new business? Here are four structures to consider:
Sole Proprietorship. Expenses and income from the business are included in your personal income tax. Any business losses may offset income you have earned from other sources. Low-cost, easy. However, you are on the hook for any and all liabilities of your business. If your business is sued, you can lose personal property. If you don’t have assets to lose and/or you are protected by insurance, this could be a good starting option.
Limited Partnership. Needs a general partner who assumes the liability and limited partners whose liability extends only to their investment in the company. Profits and losses are reported in an informational tax return that is filed with your personal tax return. There are some tax advantages to doing this, and this is also a low-cost, easy business formation. However, the general partner is still personally at risk. This structure is often used in the real estate industry.
S-Corporation. This is an independent legal entity. Corporations require a Board of Directors and can have up to 100 shareholders. Corporate debt is separate from personal debt, so you would be liable only for the money you invest in the corporation. It is more expensive than a sole proprietorship or partnership, requires more documentation, and expert accounting. Might be needed by a restaurant or manufacturer.
Limited Liability Company (LLC). Provides the separation from personal liability that corporations provide, but earnings and losses pass through to the owners and are included in the personal tax returns. This is a popular start-up structure.