What Business Structure is Right for Me?
Are you thinking about starting a business in Connecticut? One of the first steps in starting your own business is to decide which business structure is right for you. Generally speaking, there are six primary types of business structures, according to the U.S. Small Business Administration. Which one is best for you? The answer to that question will depend upon a number of different legal and tax issues that are specific to your business plans.
Types of Business Structures
What are the general types of business structures? Typically, when you start a business, you will choose one of the following types of business organizations:
- Sole proprietorship;
- S Corporation.
- Limited liability company (LLC); and
Within these categories, the business structures can get more specific. For instance, there are a number of different kinds of partnerships, including general partnerships, limited liability partnerships, and limited partnerships.
What is a sole proprietorship? In most cases, this is the most basic business structure available. It is typically ideal for an individual who plans to own a business on his or her own (and does not plan to partner with anyone else when starting the business). This is also one of the easiest types of businesses to establish because you do not have to take any formal action in order to start your business. While you will need to obtain any required licenses or permits, your business is formed when you conduct business activities. If you plan to conduct your business under an assumed name, you will need to file a tradename certificate with the Town Clerk in the town where your business will be conducted. While it may be easy to commence your business as a sole proprietor, you will be individually liable for activities in connection with your business.
In terms of taxation, a sole proprietorship is, for the purposes of taxes, the same entity as the individual who owns it. As such, the income of the sole proprietorship is the income of the individual.
Corporations, also called C corporations, typically are better for larger businesses. They are among the most complicated type of business structure, and they tend to have higher associated costs and more complicated requirements. Usually a C corp will have multiple employees. Why choose a corporation? In short, a C corp is an independent entity (that shareholders own), and as such, only the corporation is subject to liability for its actions as opposed to the business owners individually.
An S corporation, or S corp, is a particular type of corporation that is defined by its status with the Internal Revenue Service (IRS). In this type of corporation, the business’s profits and losses go through an individual’s personal tax return, and thus the business as an entity is not taxed. An S corp might allow business owners to save on taxes, but it has much stricter operational processes.
As we mentioned above, there are many different kinds of partnerships. The most basic type of partnership is a general partnership in which two parties come together to do business. It is easy to form a general partnership, and one can even be formed through an oral agreement between the parties. Other types of partnerships are more complicated. Limited liability partnerships (LLPs), for instance, are business structures in which the partners have limited liability. A general partnership can take steps to become an LLP. Limited partnerships are another type of partnership in which the business has both “general partners” and “limited partners.” Generally speaking, limited partners do not manage the business and do not share in the business’s profits and losses.
Limited Liability Companies (LLCs)
A limited liability company (LLC) is typically considered to be a hybrid form of a partnership and a corporation. It has features of both partnerships and corporations. More specifically, LLCs provide business owners with the type of limited liability in a corporation, yet the tax implications are more like those of a partnership. The U.S. Small Business Administration explains that LLC owners usually are referred to as “members,” and those members can be a single individual, two or more individuals, or even other corporations or LLCs.
Cooperatives are different than most other types of business organizations. A cooperative is an entity that is both owned by those using its services in addition to being operated for the benefits of those persons. Members of cooperatives share in the earnings of the business, and they are typically described as “user-owners.” Cooperatives can be complication to form because all of the user-owners must agree on the common needs of the business and the ways of meeting those needs. Then those members must file articles of incorporation, and they must create bylaws and a membership application. They must also conduct a charter member meeting and elect a board of directors.
In terms of taxes, cooperatives function like corporations.
The Importance of Retaining Legal Help
Of course, because there are benefits and drawbacks to each type of structure, it is in your best interests to contact a skilled business attorney before forming your business. Indeed, a legal professional can examine the specifics of your plan and help you choose the exact structure that fits your needs.