The season of Spring indicates a lot to come - end of winter with the coming of warmer weather, fresh beginnings, growth and new opportunities, and the start of tax season. As your business blooms into spring in financial or organizational growth, the season may be a timely opportunity to reevaluate your business structure.
The structure of a business that is recognized in a given jurisdiction. It is a key determinant of the activities that a business can undertake, affecting everything from raising capital, liability for obligations of the business, and the amount of taxes owed.
Common Business Structures:
Sole proprietorship - Sole proprietorship is the simplest to form and gives a single owner the sole complete control of their business. Under a sole proprietorship the business is not separated from the owner. Being a single legal entity, business assets and liabilities are conjoined to personal assets and liabilities with the owner being personally liable for the debts and obligations of the business.
Partnership - As its name implies, means that two or more people are held personally liable as business owners. The two most common kinds of partnerships are limited partnerships (LP) and limited liability partnerships (LLP):
Limited Partnerships (LP) are comprised of general and limited partners. The general partners hold the same role and liability as they would in a general partnership. The limited partners, usually investors, have limited control or input into the company along with limited or no liability. Profits are passed through to personal tax returns, and the general partner (being without limited liability) must also pay self-employment taxes.
Limited Liability Partnerships (LLP) allots limited liability to every owner, protecting each partner from debts against the partnership, they won't be responsible for the actions of other partners. Ideal for businesses with multiple owners, professional groups (like attorneys), and groups who want to test their business idea before forming a more formal business.
Corporation - the company is considered an entity that is independent of its owner(s). The business being considered its own entity implies a subjection to more regulations, records and tax requirements. As an independent entity, corporations can own property, assume liability, pay taxes, enter contracts, sue and be sued like any other individual. Four common types of corporations are:
C Corps being considered its own entity, its profits are taxed twice. The initial profit the corporation generates is taxed and then a second taxation applies as dividends are paid to shareholders on their personal tax returns. The double taxation allows for the C corp a completely independent life separate from its shareholders - capable of continued undisturbed business should a shareholder leave or sell their shares.
S Corp is a type of corporation that's designed to avoid the double taxation drawback of C corps. The business structure has the liability protection of a C Corporation along with added tax benefits, making it more appealing to small businesses. However, it must meet strict IRS criteria: it cannot have more than 100 shareholders, and its shareholders must be United States citizens. S corps are limited to only sell common stock, which lets shareholders elect the board of directors and vote on company policies.
B Corps, or benefit corporation, is a for-profit corporation recognized by a majority of U.S. states. B corps are different from C corps in purpose, accountability, and transparency, but aren't different in how they're taxed. Driven by both mission and profit, shareholders hold the company accountable to produce some sort of public benefit in addition to a financial profit. Some states require B corps to submit annual benefit reports that demonstrate their contribution to the public good.
Nonprofits are corporations that are organized to do charity, education, religious, literary, or scientific work. Because their work benefits the public, nonprofits can receive tax-exempt status, meaning they don't pay state or federal income taxes on any profits it makes. Nonprofits must file with the IRS to get tax exemption, a different process from registering with their state. Often called 501(c)(3) corporations - a reference to the section of the Internal Revenue Code that is most commonly used to grant tax-exempt status - must follow special rules about what they do with any profits they earn.
Ultimately, it is up to you, the business owner, to determine which type of business structure is best for your specific needs and future business goals. It is important evaluate and assess your business' risk potential, acceptable asset protection, and choose a suitable business structure that will help optimize the growth of your business.