February 27, 2024

How to Choose the Best Corporate Structure for Your Business

Holon Law Partners Business Law, Corporations Business, Corporate

Choosing the Right Business Structure: A Guide for Businesses

Starting a business involves many complex decisions, but one of the most important is choosing the right structure for your company. This choice impacts everything from taxes and liability to funding options and administrative requirements.

This guide covers the key things every entrepreneur should know when picking out a business structure in the United States. We’ll outline the main options, explain what you need to consider and answer common questions. Our goal is to equip you with the knowledge to make the best choice for your unique situation.

Holon Law Partners has 100+ years of combined experience guiding clients through complex cases and legal intricacies. Our approach is empathetic, customized, and client-centered with a focus on you and your unique business needs. To schedule a consultation with us, call our team at (866) 372-0726 or email us at: info@holonlaw.com.

corporate structure in NYC

The Basics of Business Structures

Before we dive into the specifics of each business structure, let’s review the fundamentals:

What Is A Business Structure?

A business structure refers to the legal framework and organization of your company. It affects your taxes, ability to raise money, liability exposure, management style, and more.

Why Does The Structure Matter?

It’s not just bureaucratic paperwork. Choosing the proper corporate structure can influence whether your business survives and thrives. Pick wrong, and you may face burdensome taxes, legal issues, or limited growth.

When Should You Decide On A Structure?

Ideally, you’ll pick a structure when legally registering your business. However, you can change it later if your needs evolve. Talk to a corporate business lawyer to understand the implications.

The Main Types of Business Structures

While State laws allow for variations, most US businesses use one of five common structures:

Sole Proprietorship

A sole proprietorship is owned and run by one person. It’s the most straightforward option, with no legal separation between you and your business. You gain flexibility but also assume all liability.

Partnership

In a partnership, two or more people share ownership of the company. Partnerships involve less paperwork than other structures but expose owners to substantial financial risk.

C-Corporation

Also called a C-Corp, this structure creates a separate legal entity from the owners. It offers liability protection but faces double taxation on profits. C-Corps can have unlimited investors.

S-Corporation

An S-Corp is a special corporation where profits, losses, and deductions get passed through to the owners’ personal taxes. This avoids double taxation but has strict ownership limits and requirements.

Limited Liability Company (LLC)

LLCs blend elements of partnerships, S-Corps, and C-Corps for flexibility. Like S-Corps, taxation passes through to owners. And LLCs limit liability without the C-Corp double tax.

Key Factors to Consider

With the basics covered, let’s explore five key factors to weigh when picking a structure:

Liability Protection

Structures like LLCs and C-Corps limit your personal responsibility for company debts and legal issues. Others, like sole proprietorships, expose you to substantial personal liability. Consider your risk tolerance.

Taxes

LLCs, S-Corps, partnerships, and sole proprietorships pass profits/losses to owners’ tax returns. C-Corps pay taxes on profits first; then owners pay again on dividends. Consider overall tax impacts.

Raising Money

C-Corps attract the widest range of investors because they can issue unlimited shares of stock. Other structures limit ownership transferability, financing options, or number of shareholders.

Complexity & Cost

Structures like partnerships and sole proprietorships involve less paperwork, compliance burden, and setup costs than alternatives. Make sure you can handle the structure’s complexity.

Long-Term Goals

Think beyond today and what you might need tomorrow. Can the structure facilitate adding partners, employees, and locations? Will it work if you expand?

Frequently Asked Questions About Corporate Structure

We’ve covered a lot of ground, but you probably still have some questions. Let’s address some of the most frequently asked:

Can I Change My Business Structure Later?

Yes, you can convert from one structure to another, like an LLC to a corporation. Talk to legal and tax advisors first since conversions can get complex.

What’s The Simplest Structure For A Small Business?

Sole proprietorships and partnerships require less paperwork and compliance than corporations or LLCs. LLCs provide liability protection while remaining relatively simple to set up and run.

How Do Structures Affect My Taxes?

Sole proprietorships, partnerships, S-Corps, and LLCs pass all profits/losses to owners, adding to personal tax liability. C-Corps pay corporate taxes first; owners owe taxes later on any dividends.

Is A Corporate Business Attorney Necessary To Choose A Structure?

No, but consulting one helps you pick the best structure for your situation and legally set it up correctly. Corporate business attorneys can explain the implications.

Can I Change From Sole Proprietor To Llc Later?

Yes. You must file formation documents, get a new EIN, and handle state-specific requirements. Talk to legal/tax professionals beforehand to understand changes.

Working with A Corporate Business Lawyer

The decision can seem overwhelming initially. But by understanding the options, weighing your needs objectively, and seeking professional advice, you can choose a business structure well-suited for your goals.

Set your business up for success by ensuring you have the proper structure from day one. And remember—revisit it from time to time as your business evolves to confirm it still fits your needs. With the right framework, you can turn your passion into a thriving enterprise.