The U.S. Small Business Administration places such a priority on the structure of one’s business that this consideration is sandwiched between “picking the location” and “picking the name” as it relates to tips to launch a new or next venture. This consideration rightfully deserves priority status; the type of business entity that you select has ramifications right away, down to the seemingly “little details” over the nearer-term, such as appropriate registration paperwork and the appropriate income tax return that one files. On the other end of the spectrum, selecting the right (or wrong) entity structure has substantive implications over the longer term, no less potentially devastating consequences associated with one’s exposure to risk in the business and one’s control over the business.
As your partners in building personal and professional financial health, O’Donnell, Ficenec, Wills & Ferdig will generally explore five types of entity categories that may be selected when one takes the leap or step into business ownership. We have supported our clients through the decades to narrow down the structure of their business from the following broad entity classifications. We have further listed these specific options in parentheses, as follows:
Partnership (Limited Partnerships and Limited Liability Partnerships)
Limited Liability Company
Corporation (C corp, S corp, B Corp, Close corporation, Nonprofit corporation)
There are also five key considerations to explore, which we’ve listed below. The entity that you select will affect the following areas of the organization. Keep in mind that some organizations are dual-structured; for instance, they may be taxed as a corporation but be structured as an LLC, which reinforces the idea that these options are not “just” business structures. They also represent tax statuses. Naturally, combining different types of entities can be quite complex and require insights from your personal advisory board.
Liability protections – Refers to one’s level of personal liability for the likes of debts and lawsuits against the business; some ways that businesses are structured (sole proprietorships and general partnerships) do not provide for metaphorical “space” between the business owner and the business as afforded by corporations and LLCs and, in the former cases, the owner(s) would be held personally liable as the organization is not a separate entity from the owner
Taxes – How the business is “treated” on the tax front depends on if the entity is incorporated or unincorporated; the former may be subject to “double taxation” if, for instance, the corporation doesn’t make additional tax elections and, thusly, is recognized as a C corp responsible for income taxes on both business income and distributions to the corp’s shareholders (unincorporated ventures circumvent this situation as the entity’s owners are held liable for taxes based on their share of the entity’s income – the likes of partnerships and LLCs are not subject to their own income tax)
Capital-raising – Corporations naturally have optimal flex in financing, because stock may be issued to pull in new investors, and there is also the option of going “public” via an IPO with some variance depending on the type of corp that is organized (for instance, S corps have shareholder- and stock class-related restrictions placed upon them, which are worthy of considering from the get-go); outside of corp structures, entities largely rely on contributions from owners and debt financing as the process of generating capital with equity financing presents its own series of headaches
Forming and nurturing the business – As long as business activities are undertaken and one doesn’t register the entity as any other type of business, it is by default recognized as a “sole proprietorship” – and it doesn’t get much easier than that! Partnerships also present attractive ease of formation upfront, as well as some appealing “maintenance” features; however, there remains very real concerns associated with the likes of personal liabilities and one’s personal wealth and assets being so intertwined with the business. By partnering with strong advisors like OFWF, many of the concerns associated with ongoing recordkeeping rules and the retention of liability protection as LLCs or corps can be minimized. And these protections are often worth their weight in gold!
Governing and operating – Bylaws are a corp’s guiding light, and they are adopted by the respective Board of Directors. This rightfully suggests a more formalized approach to governance, which is an attractive approach when the entity has multiple owners to contend with; conversely, owners within a partnership or LLC arrangement are subject to written agreements made among the owner parties, which also presents attractive flexibility in the creation of the critical documents that govern the business. The partners and members manage the partnership and LLC, respectively, and are open to structuring the management itself in different ways; for instance, owners may opt for the LLC to be managed by all membership, or by specially-designated members, who are then tasked with the business’s day-to-day ops.
While there are some variances in rules and regulations associated at least partly with the state in which you register your business, the SBA has generally defined three key differences – ownership, liability and taxes – based off of each business structure. We’ve provided a handy bulleted list for your convenience.
• Sole proprietors:
Ownership – Typically, a single individual
Liability – 100% personally liable
Taxation – Self-employment and personal taxes
Ownership – At least two people
Liability – 100% personally liable expect when structured as a limited partnership
Taxation – Self-employment for non-limited partnerships and personal taxes
Ownership – One person (or more)
Liability – Protections; not personally liable
Taxation – Self-employment and personal or corporate taxes
Ownership – One or more people with the exception of S corps (where the maximum number of owners cannot exceed 100, and must all be citizens of the United States)
Liability – Protections; not personally liable
Taxation – Corporate taxes with the exceptions of S corps (personal tax) and nonprofits (tax-exempt)
Questions? We encourage you to bring them to us. We are happy to discuss the entities explored here at greater length and alternative options, too, which may be better-suited to your situation. OFWF appreciates that our clients are one-of-a-kind and, accordingly, deserve personalized solutions that optimally position their ventures for success well into the future.