In 2021, millions of people left their jobs to start businesses. If you are considering it, the first step is choosing a structure. It is a decision that impacts the ease and cost of formation, personal liability, taxes, reporting, and the ability to raise money. Here are the different options.
This is the easiest business to form. You can register a trade name with the state or just use your first and last name. You pay quarterly estimated taxes and at tax time, profits and losses are reported on your personal income tax return. The downside: you are personally responsible for the business’s liabilities, and it is difficult to raise money.
It is relatively easy to start a partnership and taxes are paid on each partner’s tax return. Business liabilities are the partners’ personal responsibility in a general partnership. In an LLP (limited liability partnership), partners are protected against debts and are not responsible for the actions of other partners.
An LLC is a legal entity separate from its member owners. Profits and losses generally flow through to the members, liability is limited, ownership is flexible, and you can have single or multiple members.
This is an independent entity that handles the business’ responsibilities, is taxed separately, and can make a profit. The costs of incorporation can be steep and there are heavy record-keeping and reporting requirements. Another drawback: double taxation. The upside: owners’ assets are protected, and money can be raised through stock or debt. A C-corp is the standard structure, but an S-corp allows profits and losses to be passed to shareholders’ individual tax returns. Also, S-corps are not subject to the double taxation of a C-corp.
There are other considerations such as tax rates and the business‘s future. If you are thinking of starting your own company, it is important to get advice from an attorney or financial advisor. Alloy Silverstein is here to help.
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