New Year, New Business Structure

By: Lauren Jones

Is it too early to be talking about a New Year? NO! Businesses have much to do at the end of the year and coming into the new year. Things get hectic! Now is the perfect time to think about strategy and planning for the next year, while it’s the calm before the storm. 

Changing business structures is not easy and is often not a propriety. However, if you are not sure you are in the right structure, let’s discuss some of the differences between them.

Sole Proprietorship

These are easy and inexpensive, to form, but offer no liability protection. There is no difference between the business and you. If the business gets sued, your personal assets are at risk.

Since they are owned and operated by one person, you are entitled to all profits and are also responsible for losses. There is no formal action required to form the sole proprietorship, except, a business license and fictitious business name (aka DBA). It is your responsibility to withhold and pay all taxes and income.

Partnership

You have someone to share in profits and losses, but again, no liability protection. The partnership is owned by more than one person. Owners share a percentage of profits and losses based upon their contributions. The partnership obtains an EIN, business license, and permits. The Partnership has a separate tax return, but income and losses are passed through to the partners.

The best practice is to create a Partnership Agreement which are the rules that you set up between the partners. Not having a Partnership Agreement can cause issues in the long run. 

Limited Liability Company (LLC)

LLC is a hybrid between sole proprietorship/partnership and a corporation. It provides the limited liability protection of a corporation with an operational flexibility of a sole proprietorship/partnership. The limited liability protection is what separates your business assets from your personal assets, so long as the business is maintained correctly.

Owners are referred to a "members." LLCs can be a single member or multiple members. Profits and losses are passed through to each member. You must file Articles of Organization, Statement of Information, and create an Operating Agreement. The LLC obtains an EIN, business license, and permits. There is flexibility in determining taxability, meaning that you can elect to be taxed as LLC or a S-Corporation.

Corporation

Corporations have the most formalities and corporate compliance. They are considered by law to be a separate person from its owners, which again creates the liability protection. Owners are not liable for the actions of the corporation unless the corporate veil is breached. Corporations are governed by Board of Directors and Officers. You must file Articles of Incorporation, Statement of Information, and create Bylaws. The corporation obtains an EIN, business license, and permits.

Which entity you choose during your business’s lifetime is unique to you and to your business. As an attorney, I focus on the liability risk and protection. However, we often consult with a CPA to determine the best entity for tax purposes as well. You may start as one entity and change to another over time. It is best to consult with a lawyer to determine the best options for you and if you are following all the legal formalities of your current structure. Feel free to give us a call to set up a consultation. We look forward hearing from you soon!