Choosing the Right Business Structure for a Startup Company is Crucial

 Posted on January 25, 2016 in Illinois Business Law Attorneys

Determining how to structure a new business can feel like one of the most daunting and mundane tasks in creating a startup company, but it can also be one of the most crucial decisions. It determines who will be liable if the company goes into debt or bankruptcy, it can negatively affect the personal income taxes of owners, and the wrong decision may even limit the company’s decisions and possibilities. For these reasons, startup companies should investigate the pros and cons of each business structure and carefully weigh them against the company’s current and projected needs.

Sole Proprietorships

As one of the simplest business structures to set up, sole proprietorships are popular choices for solo businesses with few or no employees. Expenses and income are all included on the owner’s personal income tax return, which can offset income from other sources if the company experiences a loss. There are, however, some drawbacks to this business structure, namely the fact that the owner is responsible for all liabilities. They are highly susceptible to having their personal assets seized if their company goes under and decides to file bankruptcy. However, if there is adequate insurance or few assets to protect, it can prove to be an easy, low-cost solution to starting up a new business.

Partnerships

There are two different types of partnerships: general and limited. In general partnerships, all partners share the responsibility. In limited partnerships, there are typically general partners (who have unlimited personal liability) and limited partners (generally liable only to the amount they invested). For the limited partnership, losses are not as risky, but all general partners are personally at risk if the company goes under—regardless of which partner is responsible. Still, it is a fairly easy model to establish at a relatively low cost. And, because profits and losses are shared on personal income tax returns, there may be some additional tax advantages for partnerships.

Corporations

Corporate business structures provide the most flexibility when it comes to growth and expansion. And, because it is considered an independent legal entity, debts and liabilities fall under the responsibility of the company itself; releasing owners and shareholders from risk to their personal assets, outside of any they may have invested. Take note, however, that corporations are far more expensive and complex than other business models. The most popular model is the S-Corporation, which allows for pass-through of income and expenses to the personal tax returns of the individual shareholders.

Limited Liability Company

Limited Liability Companies (LLCs) are the newest business model structure, but they have become rather popular for companies that wish to have some form of protection without the extra taxations and expenses associated with S- and C-corporations. LLCs also offer some of the same benefits as corporations, such as flexibility for growth, but without all the limits often imposed on other corporate business structures (i.e. no limit on the number of shareholders). There are some possible drawbacks to this model, however. With no tax breaks, the possibility of being subject to hefty self-employment taxes, and some additional operational costs or filing fees, LLCs are most at risk during tax time.

Business Structure Decisions Best Made with Legal Assistance

Embarking on a new journey can be exciting. It can also be frightening. And, like most companies, you are likely to encounter a few bumps along the way. Setting up your company under the wrong business structure should not be one of them—not when there is qualified legal assistance that can help you weigh the options and consider the future.

At Law Office of James F. White, P.C., we are committed to helping you make the best possible business decisions. And, because we understand just how expensive startup can be, we offer personalized counsel in an affordable manner that is backed by more than 40 years of combined experience. Learn more about our personalized legal services by scheduling your free initial consultation with a Kane County and DuPage County business formation attorney. Call us at 630-466-1600 today.

Source:

http://www.entrepreneur.com/article/224976