Advantages of business structures differ

The most common forms for doing business are:

• sole proprietorship;

• partnership;

• limited liability company;

• regular corporation; and

• S-corporation.

A brief review of each may provide some preliminary information that can be discussed with professional advisers.

According to the Missouri secretary of state’s Web site, www.sos.mo.gov, every for-profit corporation in the state must contain the word corporation, company, incorporated or limited – or end witht an abbreveation of one of those words.

Solo operations

A sole proprietorship is the most common – and simplest – business form. It is, of course, exclusively for businesses with a single owner. You will need to file a Registration of Fictitious Name for the business with the secretary of state. If your name is John Doe and your company is John Doe’s Auto Repair, you still need to file. The taxpayer identification number for a sole proprietorship is your Social Security number, unless you have employees, and all income and expenses are reported on your personal tax return.

Working with others

The partnership is a common form for doing business when a business has more than one owner. The name of the business still needs to be registered, and a taxpayer identification number must be obtained. The partnership itself does not pay a tax, but it files an informational return. Each partner reports individual shares of the income on personal tax returns. Types of partnerships include limited partnerships, or LPs, and limited liability partnerships, or LLPs.

Individual protection

A disadvantage of both the sole proprietorship and the partnership is that the owners are personally liable for the debts and obligations of the business. The limited liability company – LLC – and the corporation will generally limit the liability for company debts to the assets of the company.

The LLC is taxed as a partnership (unless an election is made to be taxed as a corporation), and provides the owners liability protection from creditors. The LLC is a perfect structure for owning real property and is easier to operate and maintain than a corporation.

A regular or C-corporation is another option, although earnings are subject to double taxation. The entity pays tax and then the shareholder pays tax on earnings distributed as dividends. However, the first $50,000 is taxed at a low 15 percent rate.

To avoid double taxation, the company may file an election to be taxed as an S-corporation, which provides for taxation in the manner of a partnership with corporate liability protection for the shareholders. Both the regular and S-corporations may allow distribution of some of the company’s profits as dividends, which are not subject to self-employment tax, resulting in tax savings.

While taxation is not the sole consideration in structuring a new company, it is an important consideration. Before making a final decision, consult with your professional advisers to see which entity is best for your business.

Stephen F. Aton is a Springfield attorney practicing in the areas of corporate law, estate planning, and real estate. He can be reached at steve@atonlaw.com.[[In-content Ad]]