When you launch a new venture, there are endless decisions to make — from pricing your products and services to outsourcing or hiring in-house. But among the most important decisions is how you will legally structure your business. The structure you choose not only affects how your business is taxed, it can also be the key determinant in whether you’re held personally liable in a lawsuit. Here’s an overview of the various structures to consider:
Sole proprietorship
Sole proprietorship is a popular structure for single-owner businesses. In this structure, no separate business entity is formed, although your business may have a name (often referred to as a DBA, short for “doing business as”). A sole proprietorship does not limit liability, but insurance may be purchased for protection against risk.
In addition, business income and expenses are reported on a Schedule C — an attachment to your personal income tax return (Form 1040). Net earnings that the business generates are subject to both self-employment taxes and income taxes. As a sole proprietor, you may have employees, but you don’t cut a paycheck for yourself.
Limited liability company
If you want protection for your personal assets in the event your business is sued, you might prefer a limited liability company (LLC). An LLC is a separate legal entity that can have one or more owners (called members). Income is usually taxed to the owners individually, and earnings are subject to self-employment taxes.
Corporation
A corporation is a separate legal entity that allows the company to transact business in its own name and file corporate income tax returns. Like an LLC, a corporation can have one or more owners, also known as shareholders. Shareholders are generally protected from personal liability, but can be held responsible for repaying any business debts they’ve personally guaranteed.
Partnership
In certain respects, a partnership is similar to an LLC or an S corporation. However, partnerships must have at least one general partner who is personally liable for the partnership’s debts and obligations. Profits and losses are divided among the partners and taxed to them individually.
No matter the structure you decide on, the laws that make that structure favorable are always subject to change. Be sure to reassess your business’s organizational structure regularly to ensure it provides the most benefits — Magone & Company can help. Call us today at (973) 301-2300 to reach our staff of professionals.