Which legal structure is right for your business?

Which legal structure is right for your business?

4469868_sAmong all of the choices made when a business is formed, legal structure is an important decision many people in Chicago, Illinois, overlook. Legal structure determines how a business is taxed, how much liability the owners take on and even how much paperwork owners must maintain.

Choosing the wrong kind of business structure can have lasting consequences, which is why business owners should carefully research their options and consider seeking expert help.

Basic structures 

Four common business structures are sole proprietorship, partnership, limited liability company and corporation. In sole proprietorships and partnerships, the individual or partners who own the business assume financial liability and report profits or losses on their income tax returns. In contrast, a corporation is a separate legal entity that can make a profit and pay taxes. Owners are shielded from liability and do not report the business income on their taxes. Limited liability companies combine the benefits of corporations with partnerships or sole proprietorships. An LLC is not taxed as a separate entity, but owners are protected from financial liability.

Two types of corporations that offer tax benefits are non-profits and S corporations. Non-profit corporations carry out actions to benefit society, such as charity, research or education. Nonprofit corporations typically are not taxed on money they take in. S corporations are structured so income and losses are passed on to shareholders and reported on their income tax returns. This prevents double taxation of corporate income. 

Choosing a structure 

Business owners should consider a few factors when determining which structure is ideal. If a business involves a high degree of liability that an umbrella policy cannot cover and owners cannot afford, a corporation or LLC is the safer choice. However, if liability is low, forming a corporation or LLC may not be worth the initial expense, extensive paperwork and costs of recordkeeping. Taxation is another important consideration. Filing taxes for corporations is more complicated, since corporations are taxed as separate entities. However, corporations have more tax options and, sometimes, a more favorable tax rate.

To balance all of these concerns, business owners should evaluate their current assets and limitations, but they should also consider long-term needs and goals. Individuals who plan to stay with the business instead of selling out once it is profitable can particularly benefit from speaking with a business attorney to ensure they choose the best option. Although business structures can be changed, the process takes time and effort, and a poor choice can place an unnecessary burden on a new business and its owners.

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