Business Structures

What business structures are available for your business?

As a business owner, you want your company to be efficient and successful. To make sure your organization presents a strong identity, it is important to establish a business structure. As you formulate your business profile, this critical decision ultimately determines how a company is legally recognized and how it will file its income taxes. By instituting an established structure, you ensure your organization is on the path to success.

When evaluating structures, business owners must examine specific criteria, including cash flow and tax considerations. This arrangement should effectively help an organization establish credit. Several standard models are appropriate, with each one having its own unique and significant tax consequences.

The most common business structures are the:

	S Corporation (good for credit building)
	LLC - Limited Liability Company (good for credit building)
	C Corporation (good for credit building, but not practical for most small businesses)
	Sole Proprietorship (bad for credit building without personal guarantees)
	General Partnership (bad for credit building without personal guarantees)

A Sole Proprietor is someone who owns an unincorporated business on their own.  This indicates that the lone proprietor and their organization are not legally distinct entities. They are completely liable for all business debts and responsibilities.

A General Partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in all profits and losses. As with a Sole Proprietorship, all owners are responsible for any legality.

A Limited Partnership is a two-tiered agreement with both general and limited partners. General partners manage daily business operations and are individually liable for all debts. Limited partners are partial investors and therefore, should the business fail, are limited to the amount of money they can lose.

Sole Proprietorship and Partnerships are always subject to unlimited personal liability. Creditor can hold the owners responsible for debts, potentially jeopardizing their home, savings and other personal assets.

Yet with a corporation, in these types of cases, an organization’s shareholders have only the company’s invested money to lose.  

Incorporating a company establishes an organization as its own entity. Because of this, it may continue to remain in business regardless of what happens to its individual officers, managers or shareholders. Ownership may also be transferred through stock sale, without disrupting operations.

Corporations offer shareholders tax-deductible benefits, including health and life insurance, travel and entertainment deductions, and increased tax shelter for retirement plans.

The best time to incorporate is when a business has more than $25,000 per year in sales, is a high-liability organization, and can take advantage of the many tax benefits that accompany a corporation.

Some companies are eligible for Subchapter or S Corporation status. This type of organization elects to be taxed under the Subchapter S of the internal revenue code. It is most appropriate for small-business owners and entrepreneurs who prefer to be taxed as if they were still Sole Proprietors or partners.

Under the S Corporation status, shareholders pay taxes on the company’s income and report their pro-rate shares of pass-through items on their personal tax returns. This structure combines the tax advantages of a Sole Proprietorship or Partnership, with the limited liability and enduring life of a Corporation.

An S Corporation is most applicable when:  the business has less than $250,000 in sales; the proprietor lives in a region with no personal state income tax; and more than two individuals own the company.

A General Corporation, also known as a C Corporation, is the most common corporate structure. This type of company is recognized by state law as an entity separate from its owners. The organization has its own name, identity and power to achieve legal purposes distinct from all proprietors.

A C Corporation may have an unlimited number of stockholders, with their personal liability limited to solely the amount of investment.

It is best for a business to structure as a C Corporation when: the owners live outside the country; the organization has several proprietors; and the company has sales greater than $60,000.

The LLC is fast becoming a popular structure option. These businesses are not corporations, but do benefit from some of the same advantages.

LLC owners have limited personal liability for all company debts and actions. This business structure offers the same legal protections as a Corporation, while receiving the tax benefits of a Limited Partnership or C Corporation.

The LLC was initially created to provide business owners the liability protection that Corporations enjoy without the double taxation. Earnings and losses pass through to the owners and are included on all personal tax returns.

The most ideal arrangement for building business credit is one that will separate the proprietor from their organization, has its own tax identification number, and disconnects all business and personal debts. These goals are best accomplished utilizing an S Corporation, C Corporation or LLC business structure. 

Business Builder Enterprises

We have very economical options available to help you with starting a corporation or an LLC.

Being incorporated or an LLC offers many advantages in separating the individual from the company while building a stronger credit profile.