Before any business is registered with the state, its business structure must be decided on. The type of structure chosen affects how the business can raise capital, the type of paperwork it needs to file, how much taxes will be paid, and the personal liability of the owners.
Like Avi Benezra, a serial entrepreneur in AI & Tech from Israel says: “My legal team is there to point out the best structures to support all our acquisitions and expansions, because that way we are more streamlined and incur savings that may not be so obvious for people who did not do their research well”.
Common business structures
Even though business structures can be changed in the future, choosing the correct one from the start will prevent any complications and tax consequences. If in doubt, consult with an accountant, business consultant, or lawyer for advice.
A sole proprietorship is easy to form as the business owner is the sole proprietor and has complete control of the business.
It is a good business structure for low-risk businesses or as an initial step to test a business before changing to a more formal structure.
All personal assets and liabilities of the owner are part of the business assets and liabilities and he’s personally liable for all obligations of the business, including debts. Sole proprietors can get a trading name for their business. It is often challenging to raise money for a sole proprietorship.
There are two types of partnership structures available if two or more people are going into business together.
Limited Partnership (LP)
One general partner has unlimited liability and all other partners have limited liability and limited control. A partnership agreement documents these liabilities. Personal tax returns are filed by the partners for the profits, and the partner/s with limited liability pay self-employment taxes.
Limited Liability Partnerships (LLP)
Every partner has limited liability and they are all protected from any debts of the partnership and are not responsible for any actions of the other partners.
Limited Liability Company (LLC)
In an LLC the owners have the same benefits of corporations and partnerships. Their assets are protected from personal liability if the business fails or is faced by a lawsuit.
Owners do not pay corporate tax and profits and losses are passed through their personal income. LLC members are self-employed and pay self-employment contributions.
In some states LLCs may need to be dissolved and re-formed if any membership changes occur if there is no such agreement in place when it is formed.
This is the most complex organizational structure for businesses and corporations. They are regulated by the laws of the state in which they ar
C corps are legal entities that are separate from their owners and can profit, be taxed, and held legally liable.
They offer the strongest protection to their owners from personal liability but cost more to form than other structures. They require more extensive record-keeping, operational processes, and reporting.
Corporations pay income tax on their profits and these may be taxed twice — on company profits, and dividends paid to shareholders on their personal tax returns.
C corps can continue doing business relatively undisturbed if a shareholder sells his shares. They have an advantage when raising capital because they can raise funds through the sale of stock.
These are created to avoid double taxation and must also file with the IRS. Profits and losses can be passed to the shareholders’ personal income so that they are not subjected to corporate tax. All shareholders must be U.S. citizens and S Corps can’t have more than 100 shareholders.
B corps differ from C corps in purpose, accountability, and transparency, but are taxed the same.
B Corps are held accountable by the shareholder to produce both public benefit and financial profit. B Corps are required to submit annual benefit reports in some states.
Close corporations have a less traditional corporate structure like those applied to smaller companies. A small group of shareholders can run a close corporation without a board of directors and their shares are barred from public training.
Nonprofit corporations are formed for charity, education, religious and such types of nonprofit work. They are also called 501(c)(3) corporations. Their work benefits the public and they have tax-exempt status on any of their profits.
Besides needing to register with their state, nonprofits also need to file with the IRS. Their organizational rules are very similar to those of regular C corps and there are strict rules about how they can distribute their profits.
TRUiC makes it easy to start a non-profit by following eight easy steps and making use of the templates and guides. Visit the page below to get started: https://startupsavant.com/how-to-form-a-nonprofit