What Type Of Business Structure Is Best For You
Four Ways To Set Up Your New Business
- Sole proprietorship
Most new businesses get set up as a sole proprietorship because they are inexpensive to form. They are a business run and owned by one person. A sole proprietorship is created by going into business. Nothing needs to be filed with the Washington Secretary of State to create it.
Typically, I don’t recommend setting up a business like this because the business and the business owner are the same. This means that if your business gets sued or you go into debt, you’ll personally be liable for it. It also means you report business income and loss on your own personal tax return.
- General Partnership
General Partnerships are very similar to sole proprietorships, except they are owned by more than one person. They also don’t require any paperwork filed with the state to create them. Each partner pays taxes on their share of the business through their personal tax returns and the partners share in the managerial duties of the business.
I also don’t recommend setting up a business like this because like a sole proprietorship, each partner is personally liable for all of the debts and claims against the business. In addition to this, the actions of one partner can result in personal liability for other partners.
- Limited Liability Company (LLC)
This type of business structure is probably the most popular for small businesses. Many businesses are commonly set up as LLC’s. Like a corporation, the LLC business entity is separate from its owners. To create an LLC, you must file with the Washington Secretary of State.
The benefit of using an LLC as your business structure is that it limits the owners’ legal liability for business debts and/or judgments against the business. For federal taxes, an LLC is typically treated like a sole proprietorship if there’s one owner, or like a partnership if there is more than one owner. However, you can choose to have your LLC treated like a corporation for federal tax purposes. This is done by filing an entity classification election form with the IRS.
Although not required, if you are setting up an LLC, I highly recommend you speak with a lawyer to draft or at the very least look over an Operating Agreement for you that outlines what LLC owners can and cannot do so you have it in writing.
- Corporation
A corporation is a business structure that allows its owners to prevent personal liability for business debts and is the most complex out of the three listed above. To form a corporation, you must file with the Washington Secretary of State and you must create a governance document (called bylaws). A corporation is typically managed by directors who are elected by shareholders. This business structure requires you to keep good records and follow corporate formalities.
Some formalities include issuing stock certificates, holding annual meetings, keeping meeting minutes, and electing directors. Corporations file federal tax returns with the IRS. Assuming certain criteria are met, it’s possible to set up a corporation as an S corporation, which allows corporate income, losses, deductions, and credits to be passed to the corporate shareholders for tax purposes. This means each S-corp shareholder reports their share of business income and loss and pays taxes through their personal return.
Forming a corporation can be much more complicated than forming an LLC. Thus, I highly recommend consulting an attorney before setting one up to go over your goals for the business and for drafting related documents.
Every situation is unique. The information provided in this blog is for general informational purposes only. I can only advise on Washington law. I highly recommend consulting with a certified public accountant to address tax advantages or disadvantages specific to your financial situation. If you have specific questions, please feel free to reach out to the attorneys at K&S Canon for personalized guidance.
