Choosing a Business Structure for Your Startup
There are many different business structures available for small business clients to choose from. Therefore, you may be wondering what these options are and what their implications are for your business. Our experienced lawyers for business startups guide clients through each entity option to assess which option best fits the needs and goals of the entrepreneurs, the owners’ tax situations, and the exit strategy. We help our clients understand the difference between the business structure requirements for state law issues as well as their options for federal taxation to meet both short- and long-term goals.
We have helped entrepreneurs and start-ups with the following business structures:
- LLC (Limited Liability Company)
- Small Business Corporation (S-Corporation)
- Professional Limited Liability Company
Generally, the first consideration when setting up a business is the choice of the structure in which to conduct business, which is important when it comes to tax and nontax considerations.
Tax Considerations When Starting a Business
The information below presents an overview of some of the tax points that should be kept in mind when choosing a structure for your business. The information focuses primarily on the taxation of the partnership and corporate firms of doing business, the pros and cons of each, as well as the distinctions between C corporations and S corporations.
A partnership is a legal entity for a business entered into by two or more persons. There are two types of partnerships: general or limited.
- General partnership – all the partners are personally liable for partnership debts. In a limited partnership, however, at least one partner must be designated as the general partner. The general partner also has unlimited personal liability for partnership debts.
- Limited partnership – partners are liable only to the extent of their investment in the company. However, a limited partner might lose his or her "limited" status and thus be personally liable for partnership debts if he or she is viewed as playing a role in management, i.e., acting as something other than a purely passive investor.
Corporations are legal entities, independent from their owners. They provide some protection from personal liability. Thus, a shareholder's risk of loss is limited to his or her direct investment in the corporation. However, to sustain that liability shield, certain legal formalities must be observed, e.g., a corporate charter, bylaws, and a board of directors, as well as compliance with regulatory reporting requirements. Compliance with these formalities often comes with significant legal costs, which may be daunting for a startup company.
C corporations also allow for an unlimited number of shareholders. There are no restrictions on the type of ownership, whereas S corporations have a limit of 100 shareholders, all of which must be either U.S. citizens or permanent residents, certain trusts, bankruptcy estates, other estates, and certain tax-exempt organizations, not corporations (including LLCs) or partnerships. Although a C corporation does not restrict stock issuance, an S corporation can have only one class of stock.
LLCs have become increasingly common, particularly in the startup realm. In general, it is far easier and less expensive to set up an LLC than it is to set up a corporation. An LLC only requires an operating agreement outlining the expected duties of managers and the general governance of the company, thereby avoiding some of the costlier corporate formalities mentioned above.
Gravis Law is Here to Help Entrepreneurs
At Gravis Law, our services range from helping new clients through the initial start-up procedure, through capitalization and on-going business transactions, all the way through wind up and dissolution of a business. Our Gravis lawyers for business startups can help you so you can help your business at whatever stage it is in.
Hire a Gravis Business Law Attorney
Find a Gravis Law location near you. We are located on the corner of 1st and 2nd Street. Our knowledge of business law will provide you with the quality and personalized help and tools you need to start and grow your business. We look forward to assisting you through your business formation and beyond – making it as smooth and uncomplicated as possible so you can work on the things that matter to you.