One of the most important steps a new business owner will take is setting up the right legal structure for the company. The form your business decides to take will impact everything from your profits to taxes for years to come. The corporate law and business transaction attorneys at Patrick, Harper & Dixon, LLP can discuss the most common types of business formations and help complete the necessary paperwork to get your company off the ground.
Types of Business Entities
Every business entity has its own advantages and disadvantages in several different areas, with liability, taxation, and control of the business being the most pressing concerns. Among the most common entities in North Carolina are:
Sole Proprietorship. A sole proprietorship has no formal legal structure. One person owns and operates the business and is therefore entirely responsible for all decisions and obligations, including any debts of the business. The sole proprietor pays all taxes on his or her tax return. Because the law regards the business and the individual as one and the same, there is no need to file paperwork with the Secretary of State’s office.
A major drawback is that the individual owner bears personal liability for all of the company’s losses, debts, and liabilities. That means a judgment creditor can come after the sole proprietor’s personal assets.
Limited Liability Company. Also known simply as an LLC, this entity can be thought of as a hybrid between a corporation and partnership. Like a corporation, the LLC protects the individual business owners from the debts and liabilities incurred by the company. Like a partnership, taxes pass through to the owners and are reported on their personal returns. LLCs can choose to be taxed as a corporation as well.
Liability protection and pass-through taxation make LLCs one of the most popular business entities. Because of the complexity of tax implications, you should consult with an experienced attorney and accountant prior to forming your LLC.
Partnership (General and Limited). With a partnership, two or more individuals own and control the business. Profits, losses, and debts are shared among the partners, unlike a sole proprietorship in which one person bears all responsibility. Partners report their share of profits and losses on their individual tax returns.
There are two types of partnerships, general (in which partners share profits and liabilities equally) and limited (in which some partners are limited in their share of the profits and liabilities). An attorney can advise you on the best way to structure your partnership.
Corporation (C and S). A C corporation, known simply as a corporation, is run by a board of directors and executive management. Shareholders own the company, which often employs many individuals. The corporation is a separate legal entity, so its owners do not bear losses and liabilities. Not only is the corporation itself taxed, but it is subject to double taxation. That means revenue is taxed when it is earned and when it is distributed to shareholders.
The primary difference between an S corporation (S corp) and C corporation is that with an S corp, profits, losses, tax credits, and tax deductions are passed on to shareholders. The corporation itself is not taxed. A C corporation must elect to be treated as an S corp, so formation as a C corporation always comes first.
Contact Patrick Harper & Dixon Today
Selecting the entity that best fits your organization’s goal is a key step in setting your business on the path to success. Let the team at Patrick, Harper & Dixon, LLP help you get started. Give us a call today to learn more.