When establishing your business it is important to consider which business structure you wish to operate under. There are three issues to consider when establishing your business. First, are there any regulatory issues that may require you to operate your business under a specific structure? My case in point, broker/dealers must operate under a C Corporation. Legally, I have the ability to establish my firm under any of the other business structures, but the regulators of my industry will not allow my firm to be licensed otherwise. Second, tax considerations, how do you want to control your income and income tax to the business and to yourself? And third, liability and asset protection, each entity may or may not provide the appropriate liability protection you may desire in the event of lawsuit or debt collection.
There are three categories of business: corporations, partnerships, and sole proprietorships. Corporations include both sub chapter S and C Corporations. For simplicity sake, the C Corporation is taxed in its own right where as the S Corporation’s taxable income is passed directly to the shareholders 1040 tax return.
Partnerships have multiple styles and considerations to choose from. There are the General and Limited Partnerships. General Partners have the greatest amount of liability whereas a Limited Partners liability is limited to the amount of there investment in the venture. Then there are Limited Liability Partnerships and Limited Liability Companies. They provide more efficient protections and opportunities.
And lastly, Sole Proprietorships are individuals who have a business and all of their income is reported on the Schedule C of their tax return. This entity provides the greatest amount of personal liability and receives the better tax benefits. There is no free lunch; there is always a certain amount of risk and reward in any venture.
It is always worth while to spend some time and money in advance hiring a good tax attorney to advise you as to which business structure is best for you and your business. Many folks believe that Attorney’s fees are extremely high, but in reality they are fairly reasonable and you will find your money will be well spent in the long run. One misstep in this arena can be very costly, regardless of your best intentions.
And remember what Seinfeld says, “We must always use attorneys, they are the ones with the rule book.”
For additional information on this topic:
Contact us at firstname.lastname@example.org and include the article topic “Business Structure” in the subject line. I also recommend Tom Dunn, my tax attorney who has helped many of my clients, please review his vitae. Finally, David Sewell has written a comprehensive primer on Business Structure.