Starting a Business, Part One – Business Types
Over the years, we’ve helped several entrepreneurs engage in their dream of starting a business. While sharing in the excitement and potential of a startup is definitely one of the most rewarding aspects of our business, it is also one of the most difficult. The path to success is challenging and the first steps are critical. That’s why we’ve prepared this series of articles.
While there are many experts that give advice on starting a business, and many points of view on where to begin, we’ve found considering the potential structure of the business to be the best first step. By analyzing the options of basic organization, entrepreneurs must take a hard and realistic look at their undertaking and answer some challenging questions.
There are 6 potential legal structures for a business: Sole Proprietorship, C-Corporation, S-Corporation, General Partnership, Limited Partnership, and Limited Liability Company.
Sole proprietorships are the simplest organizational structure and the easiest to establish. They only allow for one owner, with all income and losses passed through to that individual and all legal and financial obligations and liability ultimately placed on that individual. When setting up a sole proprietorship, entrepreneurs are essentially trading responsibility for simplicity.
General partnerships are much like sole proprietorships, only there can be an unlimited number of general partners (each of whom are fully liable for all obligations of the business). These organizations are relatively easy to establish (only a general partnership agreement and a simple application filed with the Secretary of State are needed), and simply pass through all income and losses as does the sole proprietorship. These are ideal for a group of individuals looking to pool their resources to start a business, but aren’t concerned about personal liability.
Limited partnerships can have unlimited general or limited partners, with unlimited personal liability for the general partners and no personal liability for limited partners. As with both sole proprietorships and general partnerships, all income and losses pass through to the partners, both general and limited. Limited partnerships must also file an application with the Secretary of State.
C-Corporations are the most common type of corporation, often referred to as regular corporations. They require more legal paperwork (such as the Articles of Incorporation) and allow for unlimited shareholders and limited to no personal liability for the financial and legal obligations. Corporations are taxed at the corporate level (not the individual/owner level as in sole proprietorships), and all shareholders are taxed on dividends paid on their stock. Entrepreneurs give up some amount of control in establishing C-Corps as these companies are ultimately managed by a Board of Directors and related corporate officers.
S-Corporations are very similar to C-Corporations, but only allow for up to 75 shareholders and one class of stock. Again, personal liability is limited with this structure, but S-corporations are not taxed at the corporate level. Instead, all profits and losses incurred by the business are passed through to its shareholders. So, S-Corporations offer protection from liability while only taxing income at the individual level.
Limited liability companies can have an unlimited numbers of members who are responsible for all income and losses, but not personally liable for the obligations of the business. These specialized companies must file and follow Articles of Organization with the Secretary of State, appointing a manager to oversee its operations.
If you have any questions about which structure is right for your short and long-term business goals, contact Lescault and Walderman at 866-496-2042.