Business 101

Choosing a Business Structure

The business structure you choose influences everything from day-to-day operations, to taxes and how much of your personal assets are at risk. You should choose a business structure that gives you the right balance of legal protections and benefits.
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01

SOLE PROPRIETORSHIP
Small Family
Owned Business

-One Owner
-Self-employment tax
-Personal Tax
-Unlimited Personal Liability

A sole proprietorship is easy to form and gives you complete control of your business. You're automatically considered to be a sole proprietorship if you do business activities but don't register as any other kind of business. 

Sole proprietorships don't produce a separate business entity. This means that business assets and liabilities are not separate from the personal assets and liabilities. Owners can be held personally liable for the debts and obligations of the business. Sole proprietors may apply for a trade name. It may be difficult to raise money because there is no stock to sell, and banks are hesitant to lend to sole proprietors.

Sole proprietorships can be a good choice for low-risk businesses and owners who want to test their business idea before spending the money crating a more complicated business.

02

PARTNERSHIP

-Two + owners
-Unlimited Personal liability, unless a limited partnership
-SE tax (except LP), Personal tax
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Partnerships are the simplest structure for two or more people to own a business together. There are two common types of partnerships: a) the limited partnerships (LP) and b) the limited liability partnerships (LLP).

a) Limited partnerships have only one general partner with unlimited liability, and all other partners have limited liability, note that they do have liability. The partners with the limited liability also have more limited control over their company.  The structure and its responsibilities are clearly delineated in the partnership agreement.

  • Profits pass through to personal tax returns,

  • The general partner must pay self-employment taxes.

b) Limited liability partnerships are similar to limited partnerships, but spread the limited liability to each owner.

  • The LLP protects each partner from debts against the partnership,

  • They are not responsible for the actions of other partners.

Partnerships may be a good choice for businesses with many owners, professional groups (like attorneys, accounting firms and architectural firms), and groups wanting to try out their ideas before spending considerable time and money on a more structures and formal  business.

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03

LIMITED LIABILITY
COMPANY (LLC)

-1 or more owners
-Owners not personally liable
-Self-employment tax
-Personal/Corp tax

An LLC lets you take advantage of the benefits of the corporation and partnership business structures.

They may protect you from personal liability in most situations, your personal assets may not be at risk (your vehicle, house, and savings accounts should be protected in the event your LLC faces bankruptcy or lawsuits).

  • Profits and losses may be passed-through to personal income taxes.

  • Members of an LLC are considered self-employed and

    • Pay self-employment tax contributions towards Medicare and Social Security.

  • LLCs often have limited life spans in many states.

  • Some states require that an LLC to be dissolved and re-formed with new membership or when a member drops. 

    • This may be avoided through a prearranged agreement inside the LLC allocating for buying, selling, and transferring ownership.

Why form an LLCs?

  1. It may be a good choice for a moderate to high-risk businesses whose owners hold significant assets they want protected,

  2. If owners want to pay a lower tax rate than they would with a corporation.

04

Corporation

C corp

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A corporation (C corp) is a legal entity that has been separated from its owners. They can make a profit, be taxed, and held legally liable.

  • Corporations offer the strongest protection to its owners from personal liability,

  • The cost to form a corporation is higher than other structures,

  • Corporations have very extensive record-keeping, operational processes, and reporting requirements,

  • Corporations pay income tax on their profits

  • In many cases corporate profits are taxed twice

    • When the company makes a profit,

    • And as dividends are paid to shareholders (on their personal tax returns).

  • It has an independent life from its shareholders,

    • When shareholders leave or sell their shares, the C corp can continue doing business relatively undisturbed.

  • Corporations can raise funds through the sale of stock,

    • This may help to attract quality employees.

  • Corporations may be a good choice if you need to raise money,

    • If you plan to "go public" or eventually be sold.

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05
Corporation
S Election

An S corporation, sometimes called an S corp, is a special type of corporation created to avoid the double-taxation of C corps.

  • S corps allow profits, and some losses, to be passed through directly to owners' personal income without being subject to corporate taxes.

  • S corps may be created unequally in different states,

    • Most states see them like the federal government does and tax the shareholders accordingly, 

    • Some states tax S corps on profits above a certain limit and other states don't recognize the S corp election at all.

  • S corps must file with the IRS to get S corp status.

  • S corps also have an independent life like C corps.

    • When a shareholder leaves or sells their shares, the S corp can continue doing business relatively undisturbed.

Requirements to qualify for S corporation status:

  • Be a domestic corporation,

  • Have only allowable shareholders

    • May be individuals, certain trusts, and estates and

    • May not be partnerships, corporations or non-resident alien shareholders.

  • No more than 100 shareholders,

  • Only one class of stock,

  • Not be an ineligible corporation like certain financial institutions, insurance companies, and domestic international sales corporations.

06
Professional Corporation
(PC)

Therapist

While most people can form a regular corporation, a professional corporation is more limited.  Typically, only certain professional groups can form a professional corporation. Those professions typically include but are not limited to: doctors, attorneys, chiropractors, accountants, psychologists, psychotherapists, and similar trades.

Contrary to some opinions, a holding company cannot be used to hold shares of a professional corporation.

Here is an example of the procedures to start a professional corporation:

  • Intent to operate as a professional corporation.  It must be stated clearly, in the articles of incorporation that the owners of the corporation intend to operate as a professional corporation. It is important to determine if the state has any specific requirements before filing the articles.

  • The PC should clearly state the specific purposes of the corporation. For example, if the professional corporation is comprised of doctors, the purpose of the corporation would be to provide medical services.

  • A professional corporation must include certain language about its name, which typically should be approved by the governing body prior to filing with the state. The terms 'professional service corporation' 'professional association,' 'professional corporation,' or service corporation, must be included in the company name. Or you may use the abbreviations S.C., P.C., or P.A.

  • Individual states often require the parties involved to obtain additional approvals from the appropriate licensing boards. This will usually requires providing copies of licenses for all persons involved as owners of the corporation.

  • Attached below is a copy of the Articles of Incorporation for a Professional Corporation: