Choosing a legal business structure is a big decision. Different entities may result in different liability exposure and tax implications. There are four main types of business structures: sole proprietorships, C-corporations, S-corporations, and limited liability companies, or LLCs.
A common starting point for a startup is a sole proprietorship. This business form presents the least administrative work, primarily because there is not much distinction between the owner and the business. The IRS, as well as any creditors, will generally impute any business debts, income from any business profits, and tax obligations for business operations directly to the owner. However, when business operations expose the owner to potential liability, it may be time to choose another structure.
The C-corporation is at the other end of the administrative spectrum. In addition to procedural requirements like incorporation, articles and bylaws, a corporation is subject to double taxation. Although states like Delaware may have favorable corporate laws and shield majority shareholders from many liabilities, it may be more practical to incorporate in the state where the business actually operates. In addition, incorporating may not be the best choice for every business.
Somewhere in the middle of the administrative spectrum are S-corporations and LLCs. S-corporations are well suited to operational business, and the IRS taxes them similar to a partnership, where the owners may pay themselves a salary and avoid double taxation. Although LLC owners cannot pay themselves salaries, this entity offers tremendous protections from liabilities.
Our Virginia business law firm has advised many clients through the process of choosing a business structure that suits their needs. Business law can be complex, but an experienced attorney can save you from missteps.
Source: FindLaw, "Choosing a Legal Structure," copyright 2017, Thomson Reuters