Starting a new business is an exciting venture, but with so many business structures, deciding the legal structure of your company can seem overwhelming. Will it be a sole proprietorship? A corporation? Is it an LLC?
The five most common business legal structures are:
In a sole proprietorship, the individual who owns the business is an unincorporated business by themselves.
This type of business structure is sometimes known as the sole trader, individual entrepreneurship or proprietorship. There is no legal distinction between the owner and the business entity.
According to the U.S. Small Business Administration, a sole proprietorship is “the simplest and most common structure chosen to start a business.”
A partnership is when two or more individuals join together to create a business. According to the IRS, in a partnership “each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.”
Within a partnership, there are two common types: limited partnerships (LP) and limited liability partnerships (LLP).
The U.S. Small Business Administration notes a limited partnership has one partner with unlimited liability and all others with limited liability.
In a limited partnership, the partners with limited liability tend to have limited control over the company. Profits are passed through to personal tax returns, and the general partner — the partner without limited liability — must also pay self-employment taxes.
A limited liability partnership (LLP) gives limited liability to every owner. This structure protects each partner from debts against the partnership.
When a corporation is formed, prospective shareholders exchange money, property or both, for the corporation’s capital stock.
Sometimes called a “C-corp” a corporation is a legal entity separate from its owners.
The Small Business Administration notes corporations offer “the strongest protection to its owners from personal liability” but “the cost to form a corporation is higher than other structures.”
Operating a corporation requires more extensive record-keeping and reporting.
The IRS says S Corporations “are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.”
Becoming an S Corporation requires a business to meet certain qualifications including being a domestic corporation and having no more than 100 shareholders.
Businesses must file with the IRS to earn S Corporation status.
A limited liability company, more commonly referred to as an “LLC” combines the advantages of both the corporation and partnership business structures.
An LLC can protect an individual from personal liability in most instances.
Owners of an LLC are known as “members” and the members can be individuals, corporations, other LLCs or foreign entities. Most states, including Illinois, permit “single-member” LLCs, in which there is only one owner.
The professionals at David Mills, CPA, LLC, have offices in both Morton and East Peoria. They work with business clients in the Tri-County (Peoria, Woodford and Tazewell) area as well as beyond.
When establishing a business, contact David Mills, CPA, LLC to ensure the legal entity you select best matches your professional goals.