If you have recently formed your own start-up company, or if you are considering starting one, I applaud you. Entrepreneurship can be a great adventure and truly embodies the American spirit in that you are taking an incredible risk in order to have control over your own destiny. Speaking from personal experience, starting out on your own certainly is a risky and nerve-wracking proposition, but trust me when I say it is incredibly rewarding when it works out. As you set out on this adventure, it is of vital importance that you choose a legal structure that fits your needs.
The Core Business Legal Structures
There are numerous factors that you must weigh when starting up your own business, which includes tax considerations, control over the business, how you will be paid, and legal liability. The structure that you ultimately choose will depend on how you prioritize these factors. The following are a few popular business structures and their characteristics.
- Sole Proprietorship. A sole proprietorship is a business fully owned and controlled by the owner. They are easy and inexpensive to start up, generally requiring a filing with the local county clerk. A sole proprietorship is not taxed as an entity; instead the owner files a self-employment tax form as part of their personal tax return. The greatest shortcoming of a sole proprietorship is that the owner assumes unlimited legal liability. This means that if the business is sued, the owner’s personal assets are completely exposed.
- This is a business that involves two or more owners who come to an agreement about how the business is controlled and operated, and how the partners are paid. Like a sole proprietorship, a partnership is not treated as a separate entity for tax purposes and the partners must each report profits and losses in their personal tax returns. There is a loss of control with a partnership, since there are more people involved in the decision making of the business. In addition, both partners are personally liable if the partnership is sued. One partner can also be held personally liable for the sole actions of the other partner.
- Limited Liability Company (LLC). LLC’s are an incredibly popular business structure in that they combine the flexibility and control of a sole proprietorship or partnership with the limited liability of a corporation. In other words, a sole owner or multiple owners can decide how to run the business and divide profits, while also avoiding personal liability against debts and lawsuits. Taxation is handled through each member’s personal tax returns. The drawback of an LLC is that there is more formal paperwork, including “articles of incorporation” to establish the LLC.
Call an Experienced Tax Attorney
If you are considering starting your own company, or if you have recently done so, call me. This is an incredibly important time for your business and with twenty years of experience as a tax lawyer, I can help you get it right the first time. I earned a Master of Law Degree (LLM) in Taxation and am licensed to practice in the United States Tax Court. Let me help you. Contact The Law Offices of Robert S. Thomas at 847-392-5893 or visit our website today.