Protect Your Business with Proper Business Organization
American commercialism is driven by the success of large corporations and small businesses. Sadly, without the resources or ample financial funds that large corporations have, many small businesses fail before they ever really have a fair chance at success.
A business organization attorney, such as those at our Ogden, UT legal practice, Froerer & Miles, can assist small businesses in structuring their business in a way that best meets their unique needs. Taking into account issues such as jurisdiction, taxes, and operating objectives, our small business attorneys can recommend a business organization structure that will support the day-to-day success and future growth of the business.
Here we go over the basics of common business structure options.
Sole proprietorship is the least complicated type of business organization. This structure assigns a sole proprietor, or single business owner, who is responsible for all business profits, losses, assets, and liabilities. A sole proprietor will be required to pay self-employment tax on his or her income.
Since there is no need to define how profit-sharing will be allocated (since there is no profit-sharing) a sole proprietorship requires very few legal forms. The ease of managing and making decisions for a sole proprietorship is the biggest benefit of this type of structure.
The downfall of a sole proprietorship is that the owner’s personal assets will be at risk should the business fail. If the business is high-risk, or if there is a high potential to be sued, it is a good idea to consider a different business structure.
Limited Liability Company
A limited liability company, or LLC, is a state business structure that provides business owners with some protection against financial liability and personal liability. In basic terms, an LLC is a mix of sole proprietorship and a corporation.
The greatest benefits of an LLC are that it separates the assets of the business from the personal assets of the owner, it is much easier to set up than a corporation, and it provides some degree of flexibility.
Unfortunately, not all businesses are suited to an LLC structure. Although laws vary from state to state, in most cases banks, insurance companies, and non-profits cannot classify themselves as an LLC. The LLC structure is also not ideal if the business has plans to eventually become a publicly traded company.
Limited Liability Partnership
A limited liability partnership is very similar to an LLC, but it designates that two or more people will work together to manage the business. A limited liability partnership not only separates business assets from personal assets, but it also protects each partner’s personal assets. So, for instance, if one partner is sued, the other business partner cannot be held accountable for any losses. Limited liability partnerships, or LLPs are very common and beneficial to professional practices, such as law firms and accounting firms.
S- or C-Corporation
A corporation structure completely separates the business entity from its owner. The corporation structure significantly reduces liability and protects the owner in the event that the business fails.
In addition, a corporation can exist in perpetuity, so even if an owner dies or files for bankruptcy, the corporation can continue to exist.
Corporations can be structured as an S-corporation or C-corporation. An S-corporation is a pass-through entity, which assigns the responsibility of income, losses, deductions, and credits to its shareholders. A C-corporation is a separate tax-paying entity that files its own income tax return.
Either an S- or C-corporation requires a lot of paperwork and involves complex tax laws, so it may not be the best organization unless the corporation wants to maintain shareholders or clients prefer to do business with a corporation.
Proper organization can support the ultimate success of a business. If you have questions about the best way to structure your business or are simply looking for assistance with business decision-making or document preparation, the small business attorneys at Froerer & Miles can help. Contact us at your earliest convenience to learn more about our business organization services.