Main menu

Pages

Choosing a Business Structure | Hyswarts LLP

featured image

[author: Angela Lorenz]

Starting your own business is challenging and energizing. And yes, it can be a little stressful. During the critical start-up phase, many important decisions must be made. One of the most important decisions is choosing a business structure.

We recommend that you consult an accountant, business counselor, or business attorney when making your decision. Your business structure affects your day-to-day operations, taxes, personal debt, financing methods, and more. So when choosing your business structure, choose wisely.

Factors that determine business structure

There are several options to choose from when starting your business, including sole proprietorships, partnerships, limited liability companies (LLCs), and corporations.

Which one you choose depends on several factors.

  • Flexibility: Determine your expectations for business growth and ensure your structure is flexible enough to accommodate that growth. LLCs are generally the most flexible for growth potential.
  • responsibility: You should consider the risks and potential personal liability. You also need to consider insurance, credit, and assets. For example, companies provide the most important liability protection.
  • tax: Sole proprietorships, partnership owners, and S corporations classify their income as personal income, while C corporations separate business income from personal income. Structure affects the tax burden, as business income is taxed differently than personal income.
  • operating COst: Maintaining updated records and paperwork can be costly, so these costs should also be considered. Sole proprietorships are typically the type of business that spends the least amount of time and money on record keeping.
  • Donation: Your structure will determine how you raise funds. For example, sole proprietorships typically cannot offer shares, but legal entities can.
  • Control: If you want full control over your business, a sole proprietorship is usually the best option. However, we also accept full liability for potential lawsuits, taxes and losses.

After choosing a business structure, can I change it?

The answer is yes. In fact, it happens quite often. For example, many businesses change from simple structures such as sole proprietorships and partnerships to more complex structures such as LLCs and corporations.

Changes in business structure can occur for a variety of reasons.

  1. personal responsibility: As your business grows, so does your risk. As a result, sole proprietorship owners may want to remove liability by moving to an LLC or corporation.
  2. tax: In general, tax considerations are the main motivation for changing business structures. For example, the IRS considers businesses to be partnerships or corporations. The latter pay taxes on profits before distributing them to shareholders. However, the former are pass-through entities where profits and losses go through individual partners and require tax return reporting.
  3. Attracting investors: Venture capitalists and angel investors prefer to invest in C corporations for tax purposes. Additionally, more formal structures like corporations and LLCs establish in advance what their business arrangements and options are.
  4. more employees: As the number of employees increases, so does the liability attached to them. So moving from a sole proprietorship to an LLC or C Corporation protects you.
  5. loan: Many banks want to see a more formal business structure before making a fund.

Changing your business structure depends on your initial business setup. For example, moving from a sole proprietorship to her LLC, partnership, or corporation requires registration with the state in which she does business.

When moving to an LLC, you will need to create an LLC Operating Agreement. To transition to a joint-stock company, you must select officers, a board of directors, and a shareholder agreement.

A business attorney should be involved to sort out the details and ensure that all requirements regarding changes to the business structure are under control.

What are the types of business structures?

How to legally form a business is governed by the laws of the state in which you created your business. Your decision should consider liability, taxation, and recordkeeping.

The most common forms of business structure are:

  • Sole proprietorship
  • partnership
  • Limited Liability Company (LLC)
  • Corporation

Let’s take a closer look at which one to choose when choosing a business structure.

Sole proprietorship

In general, this option is the simplest and most common. If you are a sole proprietorship, your business is not incorporated and is run entirely by her alone. This structure gives us the right to receive all profits, but we are also separately responsible for all liabilities and debts.

If you operate as a sole proprietorship, you will obtain the necessary licenses and permits for your business. However, it varies by state and industry. Also, if you are doing business under a business name, you may legally have to apply for a fictitious name.

In many states, such as Pennsylvania, registering a fictitious name does not protect the name or give you the right to block others from registering the same fictitious name. It just informs the public that you trade in that name. Additionally, if you hire an employee, you must provide the IRS with an Employer Identification Number (EIN).

Your business entity is not taxed because you are the sole owner. Instead, it reports income and losses. Schedule C on the Form 1040.

partnership

A business is legally constituted as a partnership when two or more people share ownership. As a result, each partner contributes an aspect of the company and both share responsibility and income.

In choosing this business structure, legal partnership agreement Essential for documenting how future decisions will be made. In addition, the contract must contain terms for dissolving the partnership if necessary. A legal agreement is not required, but is highly recommended as operating a business without one is risky.

If you choose the partnership structure, you can form a general partnership. As a result, everything is split evenly between the partners. On the contrary, limited partnerships allow partners to have limited responsibilities.

You can register your partnership with the state using your established business name and all licenses and permits. Businesses must also register with the IRS and file an “Annual Information Return” to report income and losses.

The company itself does not pay income tax. Instead, profits and losses are “passed through” to the partners.

limited liability company

An LLC, or Limited Liability Company, is a legally recognized business structure that combines corporate and partnership aspects.

To form an LLC, you must first choose a name that complies with state rules. The next step is to file your organization’s articles of incorporation with your state’s business filing office (usually the Secretary of State). These are short and easy forms that usually take only a few minutes to complete.

After filing with the state, it is imperative that you work with a business attorney to create an LLC Operating Agreement that sets the legal rules for company ownership and operations.

Finally, obtain all necessary licenses and permits. Some states may also require that you publish in local publications that you plan to form an LLC.

Corporation

Becoming a legal entity is more complicated. First, the state determines the incorporation of the legal entity. Additionally, corporations pay corporate income tax at the federal and state levels.

Certain small businesses can choose Section S Avoid corporate tax and be taxed like a partnership. In that case, profits flow to shareholders as ordinary income.

In a corporation, the business becomes a corporate entity, the corporation is taxed and legally liable for all business liability.

A business must first choose a company name not in use by another corporation or limited liability company and prepare and file articles of incorporation to become a Pennsylvania corporation.

Pennsylvania businesses also need an in-state service agent who agrees to accept legal documents on their behalf. However, businesses with Pennsylvania addresses do not need to have a separate agent to service the process.

Completing the legal requirements to form a company requires publishing legal advertisements, drafting the company’s articles of association, and holding organized board-style meetings.

For more information, see our guide to registering a business in Pennsylvania.

Which business structure to choose?

The answer depends on your business, current ownership structure, and goals. You must assess your individual needs and choose the appropriate business structure.

We recommend that you consult a business expert or your local business attorney to guide your selection. It also ensures that the required documents are prepared and submitted properly.