Starting a business can be exciting and complicated at the same time. Many people are passionate about the business they are forming, but there are many items that the future business owner needs to research before they can actually form their business. If you are planning on starting a business, there may be many questions you need answers to. One of the first and most common question is “What business structure is right for me?” The most common business formation structures include:
- Sole Proprietorships
- Limited Liability Company (LLC)
It is important to understand the basic differences between these business structures because they will affect how you are able to do everyday business. The best way to determine what business structure is right for you is to speak with business lawyer about your business goals.
A sole proprietorship is the simplest business structure that exists. It consists of one person who owns a business. Importantly, the business is not a separate legal entity, so the owner is held personally liable for the debts of the business. It is a popular choice for many people due to the simplicity and ease of set up. Since there is no separation between business and owner, taxation is much simpler than other business formations.
The main advantages of a sole proprietorship include full control a person has over the business and profits are not split among multiple people. The main disadvantages include the financial burden (as you may not raise funds through the selling of stocks or having multiple owners contribute to the business’s expenses), and the risk of loss of personal assets if the business does not succeed or is held to be liable for other debts.
Partnerships consist of two or more individuals that start a business together. Partnerships, like sole proprietorships, are not separate legal entities. The individuals that own the business are personally liable for the debts of the business. The profits and losses are split between the parties and put onto each individuals’ taxes, as well.
The main advantages of forming a partnership are that you share liability. You are also not taxed as both an individual and business, as the business is not a separate legal entity, which means you have fewer tax forms to worry about. Lastly, you have more than one person contributing ideas and capital to the business. The main disadvantages include shared control of the business and the personal liability that is still at risk.
A corporation is often the most complicated and costly business structure. A corporation is a legal entity that is established separate from its owners. By having the business as its own entity, ownership can be easily transferrable. This is done with the buying and selling of stock. This can help the business easily raise funds and continue to grow. Not only can stock be bought and sold, but there also is no personal liability (except in limited, extraordinary cases).
Taxation is among the disadvantages that exist. Whether you choose a C-corporation, or an S-corporation determines if the business is subject to double taxation. The process for forming a corporation is lengthy and there are strict protocols. It is also the most expensive form to operate under, which is why raising funds through the selling of stocks is a key component. Lastly, there is much less control over the business with this structure. If you want to have full control over your business, this structure will not be preferred.
The last business structure is a limited liability company (LLC). An LLC is a good mix between a sole proprietorship/partnership and corporation. An LLC has flexibility in the way they choose to get taxed. It also contains the liability protection that is found in corporations. However, limited liability doesn’t mean no liability. Creating an LLC still gives you control over the business operations, depending on how many partners enter to form an LLC with you. The business you form is formed as a separate legal entity, which is why personal liability is limited.
Want to learn more about the basics of forming an LLC? Visit our blog, What to know when creating an LLC in Wisconsin & Illinois.
Need an experienced attorney to help you?
If you are still unsure of what business structure may be best for you, talk to an experienced business attorney. McDonald & Kloth, LLC serves both Milwaukee and Chicago in business law issues, such as business entity formation. Call us today at 262-252-9122 or use our contact fill form to get connected with us today.