Last Updated: 04.20.2022
When deciding on the legal structure of a small business, it is just as important to consider what protections each offers if the business takes a downturn, as it is to consider ownership rights and how profit is distributed. The legal structure of a business can affect how you are personally impacted by the business’s performance—so owners need to consider all of their options.
Sole Proprietorships, Limited Partnerships and LLP’s
In a sole proprietorship, a business and the individual who owns it are legally considered to be the same entity. This means that an owner is personally liable for all taxes and debts incurred by a business. Further, under this structure, a creditor can seize personal assets to settle debt and unpaid expenses. In limited partnerships, only controlling partners have full liability in the business, and limited partners are protected. The LLP structure provides liability protection for all owners.
One specific benefit that is derived from structuring a business as a limited partnership or LLP is related to taxes. Limited partnerships and limited liability partnerships offer business owners the ability to avoid the double taxation levied on corporations, as the business’s revenues and losses are taxed in each partner’s personal tax return.
LLC’s, C-Corps and S-Corps
Both C-Corporations and S-Corporations offer liability protection for owners, and allow owners to separate profit-related income from salary-related income in order to avoid paying taxes on total income. However, there are areas in which the structures can be different in terms of taxation. Unlike the typical C-Corp structure, S-Corporations are not taxed twice at the corporate and individual level.
An LLC is considered a separate legal entity from its owners. This provides liability protection to all owners—the number of which is typically limitless. Further, this structure is similar in tax requirements to an S-Corporation, allowing owners to avoid the double taxation that is inherent with C-Corps. The regulations governing LLC’s also offer the most flexibility in terms of distributing profits among owners, as the owners may structure the terms of distribution however they see fit.
ENLawyers’ Bottom Line
Each structure has different tax implications and protections for its owners. Being so, it is essential that you carefully consider the benefits and takeaways of each. Know how different corporate structures can potentially affect your business, and speak with an experienced business advisory attorney prior to choosing one.
For more information about the different types of corporate structure, or to speak with a small business advisory attorney about your business, contact the experienced small business attorneys at the Law Offices of Eldridge and Nachtman by phone at 443.559.4384 or click here.