How Should You Structure Your Business?

When starting up a business, one of the first decisions you need to make is in regards to the structure of your business. Depending on your situation, you can elect to structure your company in several different ways, including as a corporation, partnership, or limited liability company (LLC).

When structuring your business, you have a basic choice of six options. The differences between these options are mainly due to the degree of individual liability and how each is subject to taxes. The six basic business structures are:

• Sole Proprietorship -- You own the company and are responsible for both its assets and liabilities.
• General Partnership -- You contract with one or more people to run the business with equal responsibilities and liabilities.
• Limited Partnership -- Some of the partners in the partnership have less interest and liability in the company. In this type of partnership, there must be at least one general partner.
• Limited Liability Company -- You structure the company so that you and the people with whom you are starting the company have less or limited liability.
• C Corporation -- A traditional corporation that, when set up, leaves you with little or no personal liability.
• S Corporation -- The liability aspect is the same as a C corporation. The difference is the way it is taxed. C corporations are taxed twice, once on the corporate level and again on the personal level. S corporations are only taxed on the personal level.

The liability aspect involves whether you as the business owner are responsible for the debts and actions of your company. In companies structured as sole proprietorships or general partnerships, you are responsible for the business's debts. In the cases of LLCs and corporations, you as the owner have little or no liability for the debts of the business.

Corporations are set up as separate entities and as such can own property, enter into contracts, and incur debt. Because the corporation is a separate entity, you are not generally responsible for its debts or any lawsuits that might be filed against it.

One of the main problems of traditional or C corporations is that the IRS taxes them first on their corporate profits and then double taxes them by taxing the income of the shareholders. S corporations get around this problem by only taxing the income of the shareholders. Companies wanting S corporation status must conform to certain regulations, such as having at least one shareholder and not more than 100 shareholders. In addition, the corporation has to file Form 2553 with the IRS.

Sole proprietorships, partnerships, and LLCs are taxed the same way as S corporations, meaning they are taxed once on the individual level. Sole proprietorships and partnerships are also liable for a self-employment tax, which, in the case of a partnership, has to be paid by each partner. Limited partners are only obligated to pay self-employment tax on payments for services rendered to the partnership. A shareholder-employee of a corporation is immune from self-employment tax, but instead is required to pay unemployment tax.

How you structure your business depends on the nature of your business and your personal situation. Corporations, partnerships, and LLCs offer you different ways to structure your company. The main considerations have to do with individual liability and tax status. For more information, be sure to visit the IRS Web site.