Forming An LLC - Dos And Don'ts Of Choosing A Business Structure

Dos and Don’ts of Choosing a Business Structure

When you decide on forming an LLC, there are multiple steps that you need to complete even before you begin with the registration process. You have to come up with a business plan, figure out where you will get funding, and choose the name of your company. Aside from these, another important initial step is to select a suitable business structure.

Business Structure Options

The structure that you choose will affect your business for as long as it exists. Will forming an LLC be enough? Or should you choose to incorporate? The implications of your choice extend to how the Internal Revenue Service (IRS) will tax your profits. It will also determine if your personal properties have protection against liability. You have to decide based on the size of your company, personal circumstances, how you plan on managing it, and how much growth you are planning for your business. 

While there may be some minor variations from state to state, the common structures you can choose from are generally the same. Having an idea about each of them can help you make the right choice.

  • Sole proprietorship – This is the simplest and most straightforward business structure. It fits an unincorporated business owned by an individual. The owner will report the profits of the business on the individual tax return. There is no personal asset protection.
  • Partnership – Partnerships are also unincorporated businesses. However, it has multiple owners. They can either be people or other businesses. The profits will be divided among the owners. They will report these on their own tax returns. There is no personal asset protection.
    • Common Types of Partnership
    • General Partnership
    • Limited Partnership
    • Limited Liability Partnership
    • Limited Liability Limited Partnership (LLLP)
  • Limited Liability Company (LLC) – Forming an LLC is one of the most popular options for startups. It is a hybrid business structure. It limits the personal liability of owners and allows pass-through taxation. It is good for single and multiple owners.
  • C Corporation – This structure is for businesses whose profit is taxed twice — once on a business level, and another on an individual basis after the distribution of earnings to shareholders. The shareholders will have limited liability for all debts and obligations of the company. Unlike S corporations, these can have multiple classes of stock. They can also have as many shareholders as they want.
  • S Corporation – S corporation is a tax status. You cannot incorporate as one. Instead, you have to elect through the IRS. But, to do that, you have to start off as a corporation first. It is suitable for companies with one class of stock and has shareholders not exceeding 100. All of its shareholders cannot be for-profit businesses or alien residents. The profits will be taxed on the tax returns of shareholders.

What to Do

When choosing a business structure, there are certain things you need to do. These will help you weigh your options well.

  • Find out the tax and personal liability consequences of each business entity structure.
  • Create a business plan before starting. Having one will help give your company direction. It will also help dictate what type of structure is suitable for you.
  • Make sure you meet all the requirements of the state where you plan on operating.
  • If possible, get legal advice. You can also get help from a third-party organization that specializes in business compliance.

Things to Avoid When Forming an LLC

Aside from the things you need to do, keep in mind those that you need to avoid.

  • Do not begin your business operations without determining the structure. You cannot operate as a sole proprietorship if you are planning on forming an LLC. Besides, you will need to register the right structure with the state to make sure you are doing business legally.
  • Do not forget to file formation documents with the state. Make sure you are authorized to do business to avoid any legal issues. 
  • Do not panic. While choosing a business structure can be a bit overwhelming, it is not something that you have to face alone. You can consult with an expert to make sure you are making the right decision.

If you are thinking of forming an LLC, you need to make sure that the business structure fits your circumstances. If you want to learn more about the different types of business structures or are in need of guidance in figuring out which one is best for your company, contact an experienced third-party organization like DoMyLLC. Our team can continue to assist you even after you form your business.