Choosing the best legal structure for a business
Question: I am just beginning to organize a new business and would like to know if SCORE can list some of the positives and negatives of the various legal structures.
Answer: The four basic business legal structures are sole proprietorship, partnership, limited liability company (LLC), and two corporations, "S" and "C." Each has distinct advantages and disadvantages. Which of these are right for any business depends on multiple factors.
"In large part," says an article in www.nolo.com, "the best ownership structure for your business depends on the type of services or products it will provide. If your business will engage in risky activities - for example, trading stocks or repairing roofs - you'll almost surely want to form a business entity that provides personal liability protection ("limited liability"), which shields your personal assets from business debts and claims. A corporation or a limited liability company (LLC) is probably the best choice for you.
If you're business is starting on a shoestring, you might want to form the simplest type of business - a sole proprietorship (for a single-owner businesses) or a partnership (for businesses with more than one owner). Unless you are planning to do a particularly risky business, the limited liability provided by an LLC or a corporation may not be worth the cost and paperwork required to create and run one.
Additionally, sole proprietorships and partnerships are easy to set up. These don't require filing any complicated forms or fees to start your business; simply registering with the county you are located in is all that is required to open a bank account and registering the business if you will be collecting taxes. Plus, you don't have to follow any special operating rules. This gives you great flexibility, but there is one glaring disadvantage: you have no protection for you or your family. If a financial problem or lawsuit arises, your own assets are at risk and you could end up losing your first born and everything else. Insurance can minimize the risk but you are assuming great personal liability.
On the other hand, LLCs and corporations are almost always more expensive to create and more difficult to maintain. To form an LLC or corporation, you must file with the secretary of state, www.azsos.gov, and pay a fee to the Arizona Corporation Commission, www.azcc.gov, which ranges from about $50 to $95, plus additional fees for name reservation among others. Also, corporations and LLCs must elect officers (generally, a president, vice president, and secretary) to run the company. They also have to keep records of important business decisions and follow other formalities.
Of the two forms of incorporation, "C Corp" and "S Corp," the C Corp is doubly taxed, first on its profit before distribution and then the earnings are taxed after they are distributed to the stockowners. The S Corp gives the owners the needed limited liability and simplifies the taxation since there is no corporate tax. Only the distribution is taxed as personal income tax.
Before deciding on your legal business structure, talk with your tax adviser and attorney. This decision has long-term implications as to how your business will operate and how it will be taxed. It is wisest to obtain business counsel before you apply for your business license.
Include your SCORE counselor on your planning and rely on the expert advice that SCORE is noted for.
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