Selecting a Business Structure

If you’re planning to start a business in Perryton, you’re probably considering which type of business entity you want to have—a sole proprietorship, partnership, corporation, S corp, or LLC. The business structure will affect tax and legal areas of your company, so it’s not a decision to take lightly. While a corporation might work better for one company, a sole proprietorship might be sufficient for another. To help you make your decision, here’s a brief overview of each type of business structure.

If you have questions about this or other aspects of starting or running a business, the Perryton Community Development Corporation offers free business consulting to local residents. You can call 435-4014 for more information.

Sole Proprietorship
A sole proprietorship is a business that is owned and operated by the same person. There is no legal distinction between the person and the business. You receive all the profits, but you are also personally responsible for the business’ debts, liabilities, and losses.

Advantages

  • It’s simple and inexpensive to form. You don’t have to file anything to form a sole proprietorship unless you want to operate under a name other than your own. In that case, you need to file an original DBA name, also referred to as a fictitious name. Your only legal costs are for any required permits or licenses. As the sole owner, you have complete control.
  • Tax preparation is simple because the business isn’t taxed separately; its income is considered your income. Tax rates are also lowest for sole proprietorships.

Disadvantages

  • You can be held personally liable for your business for any of its debts and losses and/or any legal action against the business. This extends to liabilities because of employees’ actions.
  • If you need outside funding, it can be difficult because you can’t offer stock in the business.

Read more about sole proprietorships here and more about the tax requirements here.

Partnership
In a partnership, two or more people share ownership and responsibility for the company. The three types of partnerships are general partnerships, limited partnerships, and joint ventures.

Advantages

  • Partnerships are relatively simple and inexpensive to form. You need to register the business and its name with the state, and you need to register with the IRS and state/local revenue agencies. You’ll also need a tax ID number.
  • You share obligations, both in terms of the work and in financing the business.

Disadvantages

  • There often can be disagreements between the partners. It’s important to set expectations from the beginning. Because you’re sharing profits, there might be conflict if one partner contributes more than another partner. Because conflict can be common in partnerships, it’s a good idea to have a legal partnership agreement drawn up. It can address how you will resolve disputes, divide profits, bring in new partners, buy out partners, and dissolve the company.
  • You are personally and jointly liable for the company. Like with a sole proprietorship, you can be held personally liable for any of the business’ debts and losses and/or any legal action against this business. This extends to liabilities because of partners’ and employees’ actions.

Read more about partnerships here and about the tax requirements here.

Corporation
A corporation is a legal entity generally owned by a group of people. Because it’s recognized as an individual entity, shareholders are not personally responsible for its debts and liabilities. With this legal protection, however, come more costly and complex taxes and legal filings. A corporation is subject to taxes and requirements other business structures are not.

Advantages

  • With a corporation, there is less personal liability. Because the company is treated as its own entity, your personal assets, with the exception of your stock in the company, are usually protected from debts and liabilities.
  • Stock options are available with a corporation. This can help raise capital for the business, and it can help attract employees.
  • As an owner of the corporation, you personally only pay taxes on your salary, dividends, and bonuses. Corporate profits receive a different tax rate, which is typically lower than personal income tax rates.

Disadvantages

  • You’ll pay for the liability protection with time and money. A corporation has higher start-up and operating costs, and it requires more extensive legal filings, paperwork, and records.
  • A corporation can be double taxed—when it makes a profit and when shareholders receive dividends.

Read more about corporations here and about the tax requirements here.

S Corporation
Some corporations are eligible to be S corporations (S corps) to avoid double taxation. Under an S corp, the corporate income, losses, credits, and deductions are passed through the shareholders for taxes. As an owner, you report the company’s finances on your personal taxes, and it is taxed at individual income tax rates. An S corp provides some financial liability, but you are not protected from all types of litigation.

Advantages

  • An s corp can provide tax savings because, as an owner, only your employee wages, not the entire net income, are subject to employment tax. The company’s remaining income is taxed at a lower rate as distributions.
  • Because the company is a separate entity, you (and other shareholders) receive extra liability protection.
  • The company is less affected if a shareholder leaves the company than if a partner leaves a partnership or member leaves an LLC.

Disadvantages

  • Like with a typical corporation, an S corp has higher start-up and operation costs and takes more time for filings and records. It also has specific operational processes—like shareholder meetings and bylaws—it has to follow.
  • It also has compensation requirements that require you to receive a reasonable income. The IRS watches for things like high distributions and low salaries.

Read more about S corps here and about the tax requirements here.

Limited Liability Company (LLC)
Combining aspects of a corporation and partnership, a limited liability company provides limited liability along with less rigid operational requirements. An LLC is not taxed as its own entity. Instead, as a member of the LLC, you report the profits and losses on your personal return, and you designate the company as a sole proprietorship, partnership, or corporation for tax purposes.

Advantages

  • Like a corporation, an LLC offers limited liability protection for your personal assets.
  • Less red tape surrounds LLCs, so the start-up costs and paperwork are less with an LLC than with a corporation.
  • There are fewer restrictions on LLCs, so you can distribute profits and losses among members as you wish.

Disadvantages

  • The lifespan of the LLC as a legal entity can be affected if a member leaves the company, and you might have to form a new LLC with the existing members. It’s a good idea to address this in your operating agreement.
  • As a member of the LLC, you are considered self-employed, so you have to pay a self-employment tax. The company’s entire net income will receive this tax.

Read more about LLCs here and about the tax requirements here.

If you are unsure which business structure is right for you, it’s always a good idea to talk to your accountant and/or attorney for specific guidance. Also, as you’re setting up your company, don’t forget to secure the proper permits and licenses.


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