When preparing to start your own business, business owners must identify which business structure is the best fit for them. It is important to weigh legal considerations, tax differences, personal needs, business needs, and goals.
Sole Proprietorship:
Sole proprietorships are the most basic business structure. There is no need to register with the state, the business can just operate. However, if operating under a name other than the owner’s, a fictitious name should be filed with the state. There are no requirements for sole proprietorships for such things as shareholder meetings, voting, or elections of directors.
There is no separation between the business’s and the owner’s assets and liabilities. This means the owner is personally responsible for the debts and obligations of the business. Sole proprietorships are known as pass through entities for tax purposes, meaning that the profit or loss of the business is reflected on the owner’s tax returns. The owner is again personally responsible for any tax liabilities of the company.
Partnership:
Partnerships are the most basic business structures with two or more owners. There are several types of partnerships, each with their own structures and benefits.
A general partnership is the most basic structure, where an agreement is entered by each partner which should outline the contributions by each partner, the distribution of profits and losses, and the terms of dissolution. If there is no written agreement, profits and losses are assumed to be distributed equally. There is unlimited personal liability for the business debts and liabilities. Also, any one partner can commit the partnership to obligations.
A limited partnership is structured when there is at least one general partner and one limited partner. Limited partners are not involved on the everyday running of the business and have limited exposure to liability of the partnership.
Limited liability partnerships and limited liability limited partnerships are formed from preexisting general or limited partnerships that have filed with the Bureau of Corporations and Charitable Organizations of the PA Department of State. These partnerships provide partners with limitations and separation of business liabilities from personal liabilities.
Limited Liability Company (LLCs):
Limited liability companies are popular business structures for startup and small businesses. They limit the owner’s personal liability for the debts and actions of the LLC similar to corporations but have fewer complexities. LLCs provides flexibility of management and pass through taxations like sole proprietorships and general partnership.
There is no minimum or maximum number of members for an LLC. Members may be comprised of individuals, corporations, other LLCs, and foreign entities. LLCs require less to form over a corporation but still need to be registered with the state which has filing fee associated with it.
Corporation:
Corporations are the most complex form of business organization. They are expensive to set up, require the owners to follow more regulations and tax laws. Attorneys are typically needed to complete the registration process to ensure that the owner’s comply with state laws.
Corporations give the business a legal entity that provides complete separation from owners. The corporation structure provides the ability to raise capital by selling shares of stock to the public.
Corporations are required to pay federal and state taxes, as well as the owners/shareholders when they disclose dividends or wages from the corporation. Corporations have other requirements such as meeting, voting and election of directions and have more business administration operating costs compared to sole proprietorships, LLCs, and partnerships.
We at Rising Tide Community Loan Fund always encourage soon to be business owners to seek legal advice from an attorney or accountant in determining the best business structure for their business. We can assist with filing the required forms with the state once you determine the business structure for your business.
