BUSINESS LAW CINCINNATI: CHOOSING A BUSINESS STRUCTURE

BUSINESS LAW CINCINNATI: CHOOSING A BUSINESS STRUCTURE Posted on – 12/14/2016 by PJK So you are looking to start a business in 2017. Congratulations on making the decision to pursue the American Dream of being your own boss.  As you embark on this exciting adventure you will have to make a lot of decisions, including what type of legal structure you should select for your business.  This is an important decision, as it can impact how much you pay in taxes, the amount of paperwork you are required to file, as well as your personal liability. The most common forms of businesses are sole proprietorships, partnerships, corporations (both C and S corporations) and the limited liability company (LLC).  Because each business structure comes with different tax consequences and liability exposure, you will want to make your selection wisely, and choose the structure that most closely matches your business’ needs. The sole proprietorship and the partnership do not require any true formal documents or structure to be set up, which makes them very appealing to someone starting a new business.  However, there is a serious downside to both of these arrangements. The sole proprietor and partners in a partnership are personally liable for the business’ financial obligations and debts.  Unlike a sole proprietorship or a partnership, both the corporation and LLC are independent legal entities, separate from their owners. This provides the business owner protection from the business’ creditors. However, creating a corporation or LLC does require you to file certain documents with the Secretary of State, comply with a few more regulations and impose certain additional tax requirements. There are two basic types of corporations, the C-corporation and the S-corporation.  Both types of corporations provide liability protection, but they are taxed very differently and subject to different restrictions.  A C-corporation first pays income tax on its profit at the corporate level and then the shareholders (the business owner) pay income taxes a second time when he or she pulls the profit out of the C-corporation as a dividend.  This results in the C-corporation’s profits being subject to double taxation when they are paid out to the shareholders. An S-corporation is only subject to one level of taxation, as its profits and losses are said to “pass-through” directly to the shareholders.  Therefore, when the S-corporation makes a profit its income is reported directly on the shareholder’s tax return.  The advantage of making an election to have a corporation taxed as an S-corporation is that there is only one level of tax, but the downside is that the shareholders pay tax on the S-corporation’s profits whether they are paid out or retained inside the business. The most common business structure used when starting a business today is the LLC.  The LLC has become very popular because it provides similar liability protection as the corporation, is generally taxed as a partnership, and is much more flexible than a corporation when it comes allocating profits and losses among its members.  These factors do not necessarily make the LLC the best business entity, as each business and business owner have very specific business and tax issues that should be considered, but the LLC can provide a lot of flexibility as a business grows or takes on investors. If you are looking to start a business in 2017, let the business attorneys at Phillips Law Firm, Inc. guide you through the process of starting your business and choosing the right business structure.  To arrange for a free initial consultation call us at 513-985-2500 or email us at [email protected]. Paul Kellogg is an attorney in Cincinnati with the Phillips Law Firm, Inc. Paul’s practice focuses on providing comprehensive estate planning and probate services to families and business owners, as well as serving as outside general counsel to entrepreneurs and businesses by providing guidance and advice on a wide variety of transactions and disputes.  He can be reached at (513) 985-2500 or via email at [email protected].   Please explore Paul’s other articles on estate planning and business on the Phillips Law Firm Blog page.  The article is for educational and informational purposes only and does not constitute legal advice. Anyone contemplating taking legal action is urged to obtain proper legal advice from an attorney licensed in your particular jurisdiction For an initial consultation contact us at (513) 985-2500 or email us at [email protected] or click Chat Now!® to get started immediately.