Most Common Legal Structures

Your business structure has an impact on how much you pay in taxes, how much money you can generate, how much paperwork you have to complete, and how much personal liability you have.

Before you register your firm with the state, you'll need to decide on a business structure. Most firms will also require a tax ID number as well as the filing of the necessary licenses and permits.

Make a wise decision. While you may be able to change your business form in the future, your location may limit your options. This might lead to tax ramifications as well as an unintentional dissolution, among other issues.

It's a good idea to get advice from business counselors, attorneys, and accountants.

Partnership

The most basic form for two or more people to own a business jointly is a partnership. Limited partnerships (LP) and limited liability partnerships (LLP) are the two most prevalent types of partnerships (LLP). Only one general partner has unlimited liability, while the other partners have limited liability.

Limited-liability partners also have limited influence over the business, which is stated in a partnership agreement. Profits are passed through to individual tax returns, and the general partner — the partner with unlimited liability — is responsible for self-employment taxes.

Limited liability partnerships are similar to limited partnerships in that each owner has limited responsibility. Each member in an LLP is protected from obligations owed to the partnership, and they are not liable for the activities of other partners.

You may benefit from the advantages of both the corporation and partnership company forms by forming an LLC.

Limited Liability Company LLC

In most cases, LLCs shield your personal assets, including as your car, house, and savings accounts, from personal responsibility. If your LLC goes bankrupt or is sued, your personal assets, such as your car, house, and savings accounts, are not at danger.

 Being a member of an LLC safeguards your personal assets by separating them from your business assets.

 Profits and losses can be transferred to your personal account without incurring corporation taxes. Members of an LLC, on the other hand, are deemed self-employed and must pay self-employment taxes to Medicare and Social Security.

Corporation- C-Corp

A corporation, sometimes known as a C corporation, is a legal entity independent from its owners. Corporations can profit, pay taxes, and be held legally responsible.

 Corporations provide the best protection from personal responsibility for its owners, but they are more expensive to incorporate than alternative forms. Corporate record-keeping, operating operations, and reporting are also more thorough.

Corporations, unlike single proprietors, partnerships, and limited liability companies, pay income tax on their profits. Corporate earnings are sometimes taxed twice: first when the firm generates a profit and again when shareholders get dividends on their personal tax returns.

Corporations have a fully different existence from their stockholders. If a shareholder decides to quit the firm or sells his or her stock,

S-Corporation (S-Corp)

An S corporation, sometimes called an S-Corp, is a special type of corporation that's designed to avoid the double taxation drawback of regular C corps. S corps allow profits, and some losses, to be passed through directly to owners' personal income without ever being subject to corporate tax rates.

 Not all states tax S corps equally, but most recognize them the same way the federal government does and tax the shareholders accordingly. Some states tax S corps on profits above a specified limit and other states don't recognize the S corp election at all, simply treating the business as a C corp.

 S corps must file with the IRS to get S corp status, a different process from registering with their state.

There are special limits on S corps. Check the IRS website for eligibility requirements. You'll still have to follow the strict filing and operational processes of a C corp.

 S corps also have an independent life, just like C corps. If a shareholder leaves the company or sells his or her shares, the S corp can continue doing business relatively undisturbed.

 S corps can be a good choice for a businesses that would otherwise be a C corp, but meet the criteria to file as an S corp.

Non Profit Corporation

Nonprofit organizations are formed to carry out charitable, educational, religious, literary, or scientific activities. Nonprofits can get tax-exempt status since their work helps the public, which means they don't have to pay state or federal income taxes on any profits they make.

Nonprofits must file a tax exemption application with the IRS, which is separate from registering with their state.

Nonprofit organizations must adhere to the same organizational regulations as a conventional C company. They must also adhere to specific guidelines on the disposition of any income they generate. They can't, for example, provide revenues to members or political campaigns.

Nonprofits are sometimes referred to as 501(c)(3) corporations, after the part of the Internal Revenue Code that grants tax-exempt status.

Corporations have a different set of rules than individuals.