Structuring The Business

Posted: May 7, 2009 1:41 PM
Updated: May 7, 2009 1:41 PM

Real Small Business: Building Your Business

From the Editors of Real Small Business

Fred Steingold on Structuring The Business

By Fred Steingold

Fred Steingold, a business lawyer in Ann Arbor, MI, is the author of Legal Guide for Starting and Running a Small Business, The Employer's Legal Handbook, and How to Get Your Business on the Web (all published by Nolo Press).

Q. I'm about to start a small business. What types of legal structures should I be considering?
A. That depends. If you're the only owner, you can do business as a sole proprietorship, a corporation or a limited liability company (LLC). If you have one or more co-owners, your choices are a partnership, a corporation or an LLC. But no one choice is best for every business. Consider the following key factors, always remembering to consult your lawyer before making a final decision: Your personal liability for business debts.
By setting up shop as a sole proprietorship or partnership, you face unlimited personal liability. Your home, your personal bank account and your car can be taken to pay business debts, and you can be held liable for damages awarded for injuries caused by you, employees, or co-owners. With a corporation or LLC, however, your personal liability is limited. You generally stand to lose only what you invest in the business, although you're still liable for loans and contracts you personally guarantee and injuries you cause.
How you'll be taxed.
A sole proprietorship or partnership does not pay federal income tax. The owners report their share of income or loss on their own tax returns. A corporation, on the other hand, is taxed on its income, and the owners are taxed again when they receive income from the business. That can be avoided, however, by choosing to be an "S" corporation; in that case, income and losses will be reported only by the owners. Finally, an LLC generally isn't taxed; profits and losses are passed through to the owners.
How much paperwork you'll encounter.
You'll face little red tape if you're starting and running a sole proprietorship. There's a bit more with an LLC -- and lots more with a corporation.
Fred Steingold, a business lawyer in Ann Arbor, Mich., is the author of Legal Guide for Starting and Running a Small Business, The Employer's Legal Handbook, and How to Get Your Business on the Web (all published by Nolo Press).