Determining the Type of Organization for Your Business
When starting a business, one of the many decisions to make is which type of business organization is best for the circumstances. There are numerous legal considerations concerning liability, tax issues and continuation of the business that should be carefully weighed before making a final decision.
Sole proprietorships are a common form of organization for smaller businesses. Many business owners who choose this method prefer to form a limited liability company (LLC) because it combines the limited personal liability feature of a corporation with the tax advantage of a partnership or sole proprietorship. Profits and losses can be passed through the company.
Tax benefits available through incorporation often make this form of business organization the preferred choice. It is a complex business structure with more start-up costs than many other forms. A corporation is a separate legal entity from its owners, who own shares of stock in the company. Profits are taxed at the corporate level and again when distributed to shareholders. Shareholders are not personally liable for corporate obligations unless corporate formalities have not been observed. Corporate formalities include issuing stock certificates, holding annual meetings and electing directors.
The business can be incorporated as a "C Corporation" or "Sub-Chapter S Corporation." The latter has several additional corporate requirements, but it provides the opportunity to avoid double taxation.
A partnership provides two options: general partnership and limited partnership. Each member of a general partnership is liable for 100 percent of the partnership obligations without regard to the percentage of profits that members may share. But limited partners are restricted in their right to participate in the management of the business, and they assume liability only in the amount of their investment. Limited partners are subject to self-employment tax only on guaranteed payments like salary and professional fees for services rendered.
A lawyer can help explain the advantages and disadvantages of each type or organization, and can advise on such matters as control of the business, perpetuation of the business and personal liability issues. A lawyer can also help with the legal requirements of setting up the business.
Note: This information was prepared as a public service by the Illinois State Bar Association. Every effort has been made to provide accurate information at the time of publication. For the most current information, please consult your lawyer. If you need a lawyer and do not have one, visit our lawyer referral page.
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