What's the best legal structure for small business?

Question: I have put a great amount of effort into preparing to start my own small business, and am confident that I have a marketable service, but am still confused over what would be the best legal structure for me. Can SCORE give me some guidelines for this?

Answer: This is among the most frequently asked questions when planning a new small business start-up. It's also one of the most important ones to answer. The structure you choose will affect everything from paying taxes to assigning liability, from raising capital to sharing profits.

Each type of structure has trade-offs that should be fully understood. Here's a quick comparison of those most frequently used by small businesses:

A sole proprietorship is an unincorporated business owned by one person. Paying taxes is relatively simple, as the owner reports both income and losses along with his/her personal taxes. However, the owner is personally liable for any business-related expenses or liabilities. While there are no corporate registration requirements, sole proprietors may still have to comply with local registration and licensing laws.

In a partnership, two or more people share ownership. Each contributes time, resources, expertise, and/or money to the business in return for a share of the profits as well as any losses.

Each partner is also responsible for his/her own actions, including business debts and decisions made by the other partners. That's why a partnership agreement is a must. It should detail each participant's contributions and responsibilities, division of profits, resolution of disputes, and the handling of other major business decisions.

Then there's the corporation, an independent legal entity owned by shareholders. Corporations inherently have complex administrative, tax, and legal requirements. On the other hand, selling various types of shares in an established business can make it easier to raise capital. Plus, shareholders are not legally liable for the business's actions and debts.

A variation of this structure is the "S corporation," named for the Internal Revenue Service subchapter that defines it, and often used in situations where the shareholders are also employees. An S corporation distinguishes between shareholder/employee wages and other profit distributions, which are taxed at different rates. However, S corporations carry the same legal and administrative requirements of "regular" corporations.

The limited liability company (LLC) has become a popular structure for small businesses in recent years. LLCs offer a corporation's limited liability with a partnership's flexibility and simplified taxation. There are also fewer recordkeeping requirements, and it's entirely up to the LLC's owners (known officially as "members") to determine profit distribution. However, LLC members must pay self-employment taxes and make their own Medicare and Social Security contributions. And when a member leaves, the LLC must be dissolved.

Each structure has provisions and options that require exploration before finding the right match for your small business. And the best place to get help with this decision -- and any other small business issue -- is SCORE. Northern Arizona SCORE provides counselors throughout Yavapai, Coconino and Mohave counties. Our counselors work in cooperation with each other to provide clients with comprehensive business counseling. Counseling is also available through the Internet or telephone when getting together in person may be difficult.

In addition to individual counseling there are also many workshops offered in various locations throughout the three counties to benefit as many entrepreneurs as possible. These workshops include a basic overview that addresses the legal business structure. If you do not already have a SCORE counselor to help you through this process, please sign up through the website: http://northernarizona.score.org/localworkshops . You will be assigned a counselor who can help guide you to establishing your business structure.

For more information contact Northern Arizona SCORE at 928-778-7438 or email us at scoreoffice@scorenaz.org or visit our website at http://northernarizona.score.org,


Comments are not posted immediately. Submissions must adhere to our Use of Service Terms of Use agreement. Rambling or nonsensical comments may not be posted. Comment submissions may not exceed a 200 word limit, and in order for us to reasonably manage this feature we may limit excessive comment entries.

Use the comment form below to begin a discussion about this content.