AV Preeminent-rated Phoenix attorney Mark Briggs on the four basic business structures
A sound and well-contemplated legal structure for your company is an important step in starting your business on the right foot. In this week’s blog post, Phoenix attorney Mark Briggs outlines the four basic business structures to help you decide which may be best for you.
Although there are many types of business entity structures, the four most common are corporations, sole proprietorships, partnerships, and limited liability companies. Each has its advantages and its drawbacks, so you need to examine each structure carefully to choose the best one for your startup. And remember, these decisions have major tax implications, so always check out the IRS website and talk to an accountant before you pick one.
1. In a sole proprietorship—the most common of business organizations—a individual owns the business in his/her personal name. The owner maintains total control, and from a structural standpoint it costs almost nothing to set up, but the business liabilities become the personal liabilities of the owner. I almost never advise clients to run their businesses as a sole proprietorship, but if you are interested in learning more, click here for some additional info from the IRS.
2. Partnerships are entities owned by two or more people, and can come in many different flavors. In a limited partnership structure, one or more of the partners has limited authority and control of the entity, and one or more partners (often called a “general” partner) run the business. However, general partners are sometimes on the hook for the liabilities of the business. That is why I encourage clients to consider more exotic structures, like limited liability limited partnerships, which can shield all the partners from most business liabilities.Partnerships can be a little pricey to create, because they require a partnership agreement, which can be a very detailed, lengthy document, but they are flexible in how they allocate profits and losses to the partners, and also in how they are operated and controlled. Partnerships also usually do not pay any income taxes, but rather “pass through” any profits or losses to its partners, who then each report the income or loses on their individual income tax returns. To read what the IRS has to say about partnerships, click here.
3. Corporations are separate legal entities owned by shareholders. Corporations fall into two general categories: “S” and “C” corporations. The main difference between the two is that C-corporations pay taxes on their incomes, while S-corporations are “pass through” entities for tax purposes. Corporations have a lot of built-in legal structures, which makes them fairly robust entities with minimal set-up work. They are also well known to investors, as almost all large businesses are corporations. However, that legal structural overlay can be too confining for certain businesses—especially small ones in hyper-growth mode. Click here to review the IRS page on corporations.
4. Lastly, there is the limited liability company (LLC), which is basically a hybrid between a partnership and a corporation. These used to be pretty exotic around 25 years ago, but now LLCs are the go-to structure for most new businesses because they are flexible like partnerships, and accepted by investors as legitimate alternatives to corporations.LLCs can be taxed as a partnership, C-corporation, S-corporation or sole proprietorship. LLCs also shield their owners (often called “members”) from the liabilities of the business, but also can be expensive to set up because they require an operating agreement (much like a partnership agreement.) You can check out the IRS’s page on LLCs by clicking here.
Have you ever started a business? What structure did you choose for your company? Feel free to share your experience in the comment section below.