Getting Started: What's the Best Structure for My Business?

There's a lot of ways to do this...

Understanding corporate structures is essential to optimizing strategies, managing tax obligations, and streamlining operations. The choice of structure is key to resolving these central issues.

Key Points:

• Business entities, including Partnerships, LLCs, and Corporations, each have unique benefits and limitations that influence their suitability for what you are doing.

• Choosing the right business structure requires considering factors like tax implications, liability, and the company’s start-up and long-term growth strategy.

• Multi-state companies face specific challenges in entity management such as navigating multi-jurisdiction compliance and maintaining cross-organizational continuity.

Corporate Entities Defined:

A corporate entity is a legally recognized structure that separates the business from its owners. Simply registering a business name with the Secretary of State or the Corporations Division is only the first step in establishing a corporate entity. If properly formed, a corporate entity may offer significant benefits including:

• Limited Liability: It protects business owners’ personal assets from being directly liable in case of business debts or lawsuits. This shielding can be particularly valuable for companies operating in high-risk industries.

• Tax Advantages: A business’s entity structure dictates how it pays taxes. Some structures allow corporate profits and losses to pass through directly to owners’ personal tax returns, while others are taxed as separate entities. This flexibility allows owners to optimize their tax strategies.

• Operational Flexibility: Certain business structures offer greater flexibility in terms of ownership and management. This benefit can be especially crucial for businesses considering strategic partnerships or bringing on investors.

Choosing the right business structure will influence how efficiently your business expands operations, manages risks, and fulfills regulatory requirements in various jurisdictions. With the right structure in place, you can confidently pursue growth opportunities while ensuring sound legal and financial footing.

What are my goals?

Common Business Structures:

The defining characteristics of the most common business structures determine which is best suited for your business. Whether or not a particular benefit is being sought by new business owner, an overview of what is available can be valuable:

Limited Liability Company (LLC)

LLCs offer a versatile structure for companies to create subsidiaries or holding companies. The flexibility in management and ownership, combined with limited liability, makes this structure suitable for various corporate strategies. For instance, an LLC can be formed to own real estate, manage a specific business line, or serve as a holding company for multiple businesses.

For start-ups, LLCs provide a simple way to establish a business with limited personal liability. They are particularly popular due to their flexibility in tax treatment, potentially simplified management structures, and their limited requirements for company meetings.

Limited Liability Partnership (LLP)

This business structure is useful for (and generally limited to) professional service firms like law firms, accounting firms, architectural firms or consulting firms. An LLP provides a balance between the partnership model and limited liability protection for partners. Firms in these industries can use LLPs to create separate entities for specific practice areas or geographic regions.

For start-ups in professional services, opting for an LLP is a way to collaborate with partners while limiting personal liability. This structure allows start-ups to pool resources and expertise conveniently.

C Corporation (C-Corp)

C-corporations provide several advantages for companies seeking to raise capital through equity financing or those that intend to make a public offering (I.E. Selling their stock on the open market). They offer a clear corporate structure with defined roles and responsibilities for officers, directors, and shareholders. This structure can be used to create subsidiaries or holding companies to manage diverse business operations.

For start-ups, C-Corps may be a popular choice because they offer a robust legal structure and the ability to raise capital through the issuance of stock. However, C-Corps can be more complex to form and maintain than other types of corporations and the double taxation is often unpalatable to many business owners.

S Corporation (S-Corp)

This tax-efficient structure offers a way for companies to avoid double taxation at both the corporate and shareholder levels. It is commonly used to organize closely held businesses or establish subsidiaries with specific tax benefits.

For start-ups, S-Corps can also be a tax-saving instrument for structuring a business. By electing S-Corp status, owners can pass business income and losses through to their personal tax returns. An S-Corp, however, might not be the perfect fit due to specific eligibility requirements such as limitations on the number and types of shareholders, etc.

General Partnership (GP)

Many companies do not commonly use this business structure due to the unlimited liability risk (I.E. Each of the partners can be held completely liable for anything that occurs in the business). A GP, however, can be suitable for small, closely held businesses with a high level of trust between partners where more than one person requires full authority to act on behalf of the business and liability is not of great concern.

When forming an LLC, multi-member entities are treated as a GP by default. Unless the formation documents are drafted correctly and the proper tax treatment is elected, a new company’s owners might accidentally end up with unlimited liability risk, which means all the partners are personally responsible for all business debts and obligations.

Sole Proprietorship

A sole proprietorship is the most straightforward business structure. It allows an individual to maintain full control and responsibility for all aspects of the business. This structure, however, is not legally separate from the owner, meaning personal assets are at risk if the business faces debts or legal issues. The trade-off for simplicity is a lack of protection; any financial or legal setbacks the business encounters can directly affect the owner’s personal finances.

A single member LLC will by default be treated as a sole proprietorship. This carries with it tax issues and unlimited liability risk. However, Sole Prop can be suitable for small businesses that only register a trade name or a Doing Business As (DBA) or which is doing business in the owner’s name exclusively.

Knowledge is the key to proper evaluation.

Evaluating Business Structures:

Choosing the right business structure is critical, as it can significantly impact the long-term growth and financial health of your business.

Key Considerations:

• What is your Risk Exposure: Structures like LLCs and corporations offer limited liability, protecting personal assets from business debts and liabilities. This is especially important for companies operating in high-risk industries. In contrast, partnerships expose partners to unlimited personal liability, making them less attractive for non-professional businesses.

• Trying to Limit Taxes: Pass-through entities like LLCs and S-Corps allow profits and losses to be reported on owners’ personal tax returns, which can help with lowering overall tax liability. In contrast, C-Corps are subject to corporate income tax, which can be a drawback, but they may provide specific tax deductions and credits that may be right for your business depending on what you are trying to accomplish.

• Management and Ownership: LLCs and partnerships offer flexibility in management and ownership structures, allowing various arrangements to suit specific business needs. On the other hand, the C-Corp entity requires a more formal structure, with a board of directors and officers. This can be advantageous for a larger, more complex business organizations but may be an unnecessary burden for small, closely held businesses.

Conclusion:

It really matters which business structure is used for your business…but choosing wisely requires a careful consideration of your priorities and aspirations for the future. Certain aspects of your business will limit choices such as the number of owners, the type of business and the number of entities, the jurisdictions where your business is operating, etc. Focus on asset protection or ease of management or tax efficiency will also have an impact on your business structure choices. Expert advice is highly recommended.

Curry Andrews, Attorney