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Choosing a Business Structure: A Look at Your 5 Main Options

Of all the choices you make when starting a business, one of the most important is the type of legal organization you select for your company. This decision can affect how much you pay in taxes, the amount of paperwork your business is required to do, the personal liability you face and your ability to borrow money.

The Internal Revenue Service states this on its website, specifying just how the business structure you choose will impact you, as well as your business, for years to come.

Given that the best structure for a business will depend on various factors – such as the work/services of the business, the size of the business, the goals and needs of the owners, etc., it’s advised that you consult with an experienced attorney like Denver Business Lawyer Thomas E. Downey when you need help choosing a business structure. However, to clarify just what your options are, this blog series will point out and discuss the 5 main options for legal business structures.

Choosing a Business Structure: The Primary Options

1 – Sole Proprietorships

man walking through a keyhole

As the simplest and most common structure for business organizations, sole proprietorships typically only involve one person who owns and manages the business. So, if you work from home and/or alone (regardless of whether this work is part- or full-time), this can be a good option for you.

Some of the benefits of sole proprietorships can include (but are not limited to):

  • Having complete control over the business
  • Certain tax implications, as a sole proprietor’s business losses, may be offset by his income given the way that they have to file taxes (Sole proprietors have to file personal income taxes (Form 1040), Schedule C forms (for business profits and losses) and Schedule SE forms (for self-employment tax purposes); additionally, sole proprietor’s businesses are only taxed once, which is not the case for other business structures.

Some of the disadvantages of sole proprietorships can include (but may not be limited to):

  • Difficulties raising money, as lending institutions can be uneasy about making loans to sole proprietors (while they may be more inclined to offer loans to businesses with other structures)
  • Being personally liable for the company’s liabilities, such as its debt or any lawsuits filed against it.

2 – Partnerships

maze being erased for direct path

When multiple individuals will be the owners and managers of a business, partnerships may be a better option when choosing a business structure. With partnerships, there are two options:

  • General partnerships, in which all partners own and operate the business while sharing responsibility and liability for the business
  • Limited partnerships, in which there are some partners who own, operate and share liability for the business (general partners) and there are others who only invest money in the business (investors).

Some of the benefits of partnerships can include (but are by no means limited to):

  • The tax implications, as partnerships are not taxed on their income; instead, each partner will file a Form 1056, Schedule K-1 to report his or her share of the income/profits and business losses
  • Shared responsibility for the business, which can be beneficial from an operational/management standpoint (particularly for larger businesses).

Some of the drawbacks of partnerships can include (but are by no means limited to):

  • The liability, as the business partners, will all be personally liable for the company’s debts and other obligations (For instance, any single partner can take out a loan for the business that all other partners would then be responsible for repaying.)
  • The costs of setting them up, as it can require the help of various legal and financial professionals to get partnerships up and running.

Choosing a Business Structure: More Options

3 – Corporations

Far more complicated than sole proprietorships and partnerships, corporations involve setting up the business as an independent legal entity – that is, independent of its owners. While corporations must be set up in accordance with all state laws and they can be subject to various regulations, some of the benefits of corporations can include (but are by no means limited to):

  • Protection from personal liability for the obligations and debts of the business, as these debts and obligations, will not fall on the owners if the business can’t satisfy them for whatever reason
  • More opportunity to raise funds for the business, as a corporation can sell stock, apply for loans, seek venture capital investments, etc.
  • Their enduring nature, as corporations will continue to exist even if an owner becomes incapacitated, passes away, etc.

Some of the drawbacks of corporations can include (but are by no means limited to):

  • The costs, as it can be quite expensive to keep a corporation in compliance with all federal and state regulations; more accounting/tax help is necessary on an ongoing basis, etc.
  • The taxes, as the owners of corporations are subject to federal and state corporate income tax, as well as personal individual income tax.

4 – Limited Liability Companies (LLCs)

Arising in 1977, LLCs have become a popular and attractive option for those choosing a business structure, as LLCs can offer some of the major benefits associated with partnerships and corporations.

As the name implies, LLCs are intended to limit the liability that owners shoulder; additionally, they prevent owners from experiencing the double taxation that can plague corporations.

Some of the other benefits of LLCs can include that they:

  • Give all owners the opportunity to play a role in operating the business
  • Do not limit the number of owner or partners for a business.

Some of the drawbacks of LLCs can include (but are by no means limited to):

  • Their temporary nature, as LLCs can end after a certain number of years (according to state law) and/or upon the death or incapacitation of one of its owners
  • Difficulties operating the business across state lines, as states’ laws regarding LLCs can differ.

5 – S Corporations

As an alternative to C corporations (or just traditional corporations as discussed in the previous part of this blog series), S corporations can be more appealing options for the owners of small businesses.

Some of the benefits of S corporations can include (but are by no means limited to):

  • Tax benefits, as there will only be one level of federal taxes to pay on the business income
  • Protections from personal liability, which are similar to those offered for the owners of C corporations
  • The option to have as many as 100 shareholders, which can increase the funding options while also making S corporations more attractive to potential lenders/other investors.

Some of the drawbacks of S corporations can include (but are by no means limited to):

  • The regulations with which they must comply, as S corporations can be bound by as many (and the same) regulations as C corporations
  • Higher startup costs, as well as higher ongoing maintenance costs (in terms of accounting expenses).

Denver Business Lawyer at Downey & Associates, PC

Do you need help choosing a business structure, setting up your business and/or resolving any business legal matter? If so, it’s time to contact Denver Business Lawyer Thomas E. Downey. Since 1983, Attorney Thomas Downey has been providing individuals and businesses in the Denver Metro Area and throughout the U.S. with the highest level of legal service for their litigation and business legal issues.

This means that you can count on him to provide you with personalized service while expertly guiding you through the legal system so that you can achieve the best outcomes to your important legal matters.

To find out more about how Denver Business Lawyer Thomas E. Downey can help you, set up an initial consult with him today by calling (303) 813-1111 or by emailing us using the contact form on this page.

From our law offices in Centennial, we serve clients throughout Colorado and the U.S.

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