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Organizational Structures for New Businesses

Posted by Traci A. Malik Posted on Aug 13 2016

One important consideration when starting your business is determining the best legal organizational structure. Why? Because it will affect operating efficiency, transferability, control, the way you report income, the taxes you pay and your personal liability.

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Four basic structure types are:

  • Sole proprietorship
  • Partnership 
  • Corporation — S corporation, C corporation 
  • Limited liability company (LLC)

 

SOLE PROPRIETORSHIP

• The simplest legal structure for any business and is not legally separated from the owner.

• The legal business name is typically the same as your legal name, but establishing a business name separate from your own is possible by creating a doing business as (DBA) name or fictitious name.


• Owner can take cash withdrawals from the business at will.

• Owner required to make quarterly extimated tax payments.

• Some states and municipalities may require obtaining a license or permit.

 

PARTNERSHIP

• The difference between a sole proprietorship and partnership is that a sole proprietorship has only one owner and a partnership has two or more owners.

• Owners can take withdrawals and, if specified in the partnership, guaranteed payments.

• Owners pay taxes quarterly.

• Can be started through an oral agreement, though a written agreement is advisable.

 

C CORPORATION

• A separate legal entity from its owners.

• Corporate documents are filed with the state and annual fee is paid.

• Separate corporate bank accounts and records are created,and assets and money generated by the corporation are owned by the corporation.

• Most businesses must register with the IRS and state and local revenue agencies. Although any business that has employees will need to get a tax ID number, it is required for a corporation.

• Unlike sole proprietors and partnerships, corporations pay income tax on their profits. In some cases, corporations are taxed twice —  first, when the company makes a profit, and again when dividends are paid to shareholders on their personal tax returns.

 

S CORPORATION

• To be considered an S corp, you must first charter a business as a corporation in the state where it is headquartered.

• An S corp is different from a C corp in that its profits and losses can pass through to the owner’s personal tax return. Consequently, the business is not taxed itself. Only the shareholders are taxed. Losses are limited to the shareholder’s tax basis.

• Shareholders can be paid wages, receive distributions of profits or a combination of wages and distributions. 

 

 

LIMITED LIABILITY COMPANY (LLC)

• A hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational  flexibility of a partnership.

• Unlike shareholders in a corporation, in most states LLCs are not taxed as a separate business entity. Instead, all profits and losses are passed through the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would.

If you have questions about forming a new business or changing your businesses structure, Jones and Company CPAs can help. Contact us at 727-845-4166 or find us online at www.JonesCPAs.com.