9/6/2016 0 Comments
One of the key decisions any business owner must make when they launch a new business is what sort of business it will be. There are some basic ownership structures for small businesses. These include:
Sole Proprietorship – This is when you are the sole owner of your business and the primary employee/worker.
Partnership – This is for when you have a business partner and you both own the business together.
LLC or Limited Liability Corporation – This business structure provides some of protections that a corporation provides and some of the benefits of a sole-proprietorship or partnership.
A corporation – The most formal business ownership structure that divides ownership between multiple parties who each hold a share of the ownership and are hence called share owners.
So right away it’s clear that there are several things you need to determine to know which structure is right for you:
How many owners do you have?
How much more does the added protection of an LLC or a Corporation cost? Is it worth it for your business?
What sort of finances are involved and are they large enough that they require the extra protection of a corporation or LLC? What are your businesses unique risks and liabilities and what is the best way to insure against them?
What sort of income tax structure would be best for your business?
Does your business want to be able to have investors?
So let’s take a bit closer look at a few of the issues that will inform you answers to these questions:
What’s at risk?
When it comes down to it, the major determining factor in the type of business structure you use is the type of product or service you provide to your customers or clients. Basically, the riskier the activities your business will take part in, the more protection you should have. A good example is that if you provide any sort of financial services you’ll clearly want extra protection. Another more practical example is that if you are a contractor who does roofing, because of the value of property and homes, extra protection really makes sense as well.
So evaluate what sort of risks you have. Imagine things going wrong and then ask if your client may try to file a lawsuit against you. If there is a good chance they may do this, then an LLC or corporation likely makes more sense than partnership or sole-proprietorship. A wise first step is to sit down with an experience small business attorney like myself and talk about your business. Even if you are already in business and have been for years, it’s never too late to change your business ownership.
What are the differences in expenses?
One of the biggest advantages of sole-proprietorships and partnerships is that they are not only easier to setup and maintain, they are also less expensive. An LLC, for example, will cost anywhere from $50-$750 to file depending on the state you are incorporating in. Additionally, you must adhere to all requirements to maintain the legal protection an LLC or corporation provide.
Basically, if you don’t have anything at risk, doing the extra work and spending the extra money on forming an LLC or corporation can be detrimental to the ability of a young business to survive. You need to assess your specific situation to know the best decision, but if low-cost and low-maintenance is what your business needs, it may be best to wait to incorporate until later down the road. As always, the Law Offices of Yoel Molina are just a phone call away if you want advice from an experienced, practicing small business attorney.
What about taxes?
This is another area that can be a little overwhelming for first-time or young business owners. What are the tax obligations of different business ownership structures? While you should look into this more fully or discuss with an experienced attorney before making a final decision, the difference in taxes between an LLC, partnership, or sole-proprietorship is minimal. All three have what is called a pass-through type of tax entity status. This means all the taxes on profits and losses are filed with the owner’s personal taxes and therefore offer a simpler and less tax-heavy option to business owners.
Corporations, on the other hand have a more complicated tax structure and ultimately pay more taxes than the other types. But this is also because they provided greater protection as well as investment opportunities, which we’ll discuss next.
What investment opportunities are available?
If you form your business as a corporation, you can actually sell shares of the businesses ownership via a stock option. Key benefits of doing this is the ease it makes attracting new investment capital and talent (because you can offer them stock options as part of their employment package).
So what if you are the kind of business that just isn’t going to go public? Should you form a corporation? There are added protections that a corporation provides, but in most cases, if going public isn’t in your business plan, there is likely little benefit to the extra time and tax burden of incorporating. As always, you should discuss your specific business needs, risks, and liabilities with a qualified and experienced small business attorney.
What can you do if your business has the wrong ownership structure?
This isn’t that big of a deal, so don’t panic! Why? Because business structures are never set in stone. You can change your business structure, so if you need to do that, then start making the necessary steps. If you are in the greater Miami-Dade area, the Law Offices of Yoel Molina are here to help you. Give us a call today and we can help you begin the process of filing for a new business ownership structure.
Still have questions?
Please call us for a free appointment with Miami business attorney Yoel Molina in our Miami office at 305-548-5020.
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