Business Structures

The Big Picture Operations Business Structure

CONTENTS

The Basics Unincorporated Sole Proprietorships Partnerships

There are several different ways to form a business—each with its own advantages and potential drawbacks.

Incorporated Corporations Limited Liability Companies Resources

This guide will simplify the options and get you on your way.

This work is licensed under a Creative Commons AttributionShareAlike 4.0 International License.

May 2018 | 1

Operations Business Structure

CONTENTS

The Basics

The Basics

All businesses fall into one of two categories: incorporated and unincorporated.

Unincorporated ‣ Sole Proprietorships ‣ Partnerships Incorporated ‣ Corporations Limited Liability Companies Resources

There are two main implications for the choice of whether or not to incorporate: ▸▸ Limiting liability Certain business structures protect owners from debts incurred while doing business or the risk of being sued. ▸▸ Taxes Income from sole proprietorships, partnerships and LLCs “pass through” to the owners and are taxed as individual income.

Corporations however, are separate legal entities and therefore pay taxes on profits they make. This can lead to “double taxation” with taxes paid both by the owners and the corporation, but there are tax advantages as well.

Some questions to ask when considering the right business structure: ▸▸ Is this a business or a hobby? ▸▸ Are you concerned about being personally liable for your business debts and other obligations? ▸▸ Are you interested in a flexible tax structure? ▸▸ Are you willing to put the time, effort, and money into incorporating and ongoing corporate obligations?

May 2018 | 2

Operations Business Structure

CONTENTS

Unincorporated

The Basics

Unincorporated businesses are easy to start and manage and are the right choice for simple businesses that aren’t worried about incurring major debts, being sued or taking money from outside investors. There are no distinctions in unincorporated businesses between the company and its owners.

Unincorporated ‣ Sole Proprietorships ‣ Partnerships

If the company owes money, they owe money.

Incorporated ‣ Corporations

If the company gets sued, they get sued.

Limited Liability Companies

If the owners die, the company dies.

Resources

The advantage is that unincorporated businesses have “pass through” tax structures and all taxes are paid by owners as income.

Unincorporated Tax Structure

% tax

There are two main kinds of unincorporated businesses: ▸▸ A sole proprietorship is a company owned by one person. ▸▸ A general partnership is a company owned by two or more people.

In 2008, 71.5% of businesses filed taxes as sole proprietors and 10% filed taxes as partnerships.

Source: IRS May 2018 | 3

Operations Business Structure

CONTENTS

Sole Proprietorships

The Basics

Forming and operating a sole proprietorship If you are the only owner of your business, you’re automatically a sole proprietor simply by conducting business.

Unincorporated ‣ Sole Proprietorships ‣ Partnerships Incorporated ‣ Corporations Limited Liability Companies Resources

Although there aren’t complicated start-up requirements for establishing a sole proprietorship, there may be requirements for registration and business licenses or permits you’ll need to make your business legit. You can see a list of federal licensing requirements here and links to state requirements here. Be sure to also check with your city government for any zoning, permitting or license requirements.

As a sole proprietor you can either do business under your own name or you can register a trade name or DBA (“doing business as”) with your state. Consult your secretary of state’s website for more information.

When it comes to taxes, your business earnings or losses will be reported directly on your personal income tax return. You will want to submit quarterly estimated tax payments, track and report deductions and apply for all available small business tax credits.

Check if you need to pay self-employment tax or estimated taxes.

If you have employees, you’ll need to comply with state and federal employer requirements. See our guide Hiring People Basics for more information and our Legal Services Buyer’s Guide for information on legal services.

For a great overview, check out NOLO 50 State guide to

establishing a sole proprietorship.

May 2018 | 4

Operations Business Structure

CONTENTS

Partnerships

The Basics

Forming and operating a partnership Forming a partnership will take a little more work than becoming a sole proprietor. The biggest difference is that you will write and sign a partnership agreement that lays out your plans for the company including ownership percentages, responsibilities of each partner and what happens in various contingent situations. For more about partnerships and partnership agreements, check out our Business Partnership Basics Guide.

Unincorporated ‣ Sole Proprietorships ‣ Partnerships Incorporated ‣ Corporations Limited Liability Companies Resources

You will need to register a business name that is unique to you.

This can either be the last names of the partners or a trade name.

Consult your secretary of state’s website for more information.

From there you will want to investigate registration and business licenses or permits needed to make your business legitimate.

You can see a list of federal licensing requirements here and links to state requirements here. Be sure to also check with your city government for any zoning, permitting or license requirements.

When it comes to taxes, your business earnings or losses will be reported directly on your personal income tax return. That said, you will still need to file the partnership’s income (Form IRS 1065) as well as the details on how income was divided between partners (Schedule K-1).

If you have employees, you will need to comply with state and federal employer requirements. See our guide Hiring People Basics for more informationand our Legal Services Buyer’s Guide for information on legal services.

May 2018 | 5

Operations Business Structure

CONTENTS

Incorporated

The Basics

When a business is incorporated it becomes a separate legal entity called a corporation.

Unincorporated ‣ Sole Proprietorships ‣ Partnerships Incorporated ‣ Corporations

The owners of a corporation have limited liability, which means they get some protection from debts or legal penalties incurred by the corporation.

Corporations have very flexible ownership structures, including the ability to issue shares or stocks. This means there are many ways to finance a corporation.

Limited Liability Companies Resources

Because corporations are separate legal entities, they pay taxes on profits they make (IRS 1120). This can lead to “double taxation” with taxes paid both by the owners and the corporation. S-Corporations are the exception to this—they file a form (IRS 2553) electing to be taxed as a partnership.

Corporate Tax Structure

% tax

% tax

Check out BizFilings’ great guide on corporate taxes.

Keep in mind that it takes more time and effort to manage a corporation, including governance, accounting and reporting requirements. Also know: corporations can be for-profit or non-profit.

May 2018 | 6

Operations Business Structure

CONTENTS

Corporations

The Basics

Forming and operating a corporation The requirements for forming a corporation will vary depending on state law. You can find a link to your secretary of state’s website here. Keep in mind that you don’t need to live in the state where you incorporate.

Unincorporated ‣ Sole Proprietorships ‣ Partnerships Incorporated ‣ Corporations Limited Liability Companies Resources

While it is possible to file the incorporation paperwork on your own, most people work with an attorney or online service. Guide to Legal Services.

Managing a corporation is a bit more work-itensive than other business structures. For one thing, every corporation maintains a set of key documents including articles of incorporation, company bylaws, stock certificates or grants, a list of shareholders (AKA a cap table) and any shareholder or board resolutions.

In addition to having business managers, corporations have an additional layer of oversight called a board of directors. The officers of the company (CEO, president, etc) take care of the day-today management of the business and report to the board. Board members do not have to be shareholders, although they represent the interests of shareholders. The company’s bylaws lay out the rules of the corporation.

Every company has a registered agent to receive any legal and tax correspondence.

As with unincorporated businesses, you will need to name your company, register the business with state and city, acquire proper permits, licenses and zoning and file taxes as a corporation. If you are an employer, you must meet the legal and record keeping requirements.

S-corporation S-corporations are exactly like corporations in most regards. The key differences are that they are taxed as a partnerships, are limited to 100 shareholders, and can’t issue some kinds of stock.

May 2018 | 7

Operations Business Structure

CONTENTS

Limited Liability Companies

The Basics

Limited liability companies, or LLCs, are a hybrid between a corporation and an unincorporated company.

Unincorporated ‣ Sole Proprietorships ‣ Partnerships

They are like sole proprietorships or partnerships in that they don’t pay taxes separate from their owners but have a “pass through” tax structure.

Incorporated ‣ Corporations

Unincorporated Tax Structure

Limited Liability Companies Resources

% tax

But like corporations, LLC owners have limited liability for debts and legal penalties incurred by business. However, they have fewer obligations than corporations when it comes to governance, administration and recordkeeping.

Forming an LLC Because LLCs are a bit more straightforward, it’s possible to file the articles of organization yourself by submitting forms found in your secretary of state’s website . Otherwise, see our Legal Services Buyer’s Guide for ideas on hiring an attorney. If you have multiple owners, you will need an operating agreement that lays out terms for owners (which in the case of an LLC are called members).

As with unincorporated businesses, you will need to name your company, register the business with state and city, acquire proper permits, licenses and zoning and file taxes as a corporation. If you are an employer, you must meet the legal and record keeping requirements.

May 2018 | 8

Operations Business Structure

CONTENTS

Resources

The Basics

While it is possible to register a business on your own, having a lawyer’s help is recommended for all but the most basics set-ups.

Check out our Legal Services Buyer’s Guide for some ideas on hiring an attorney.

Unincorporated ‣ Sole Proprietorships ‣ Partnerships Incorporated

Once you have set-up your business, having Employer Identification Number, having an EIN can be useful.

‣ Corporations

Do you need an EIN?

Limited Liability Companies

Apply for EIN online

Resources

Your legal name and the name that you “do business as” (DBA) do not have to be the same.

DBA overview Corporate Tax implications Corporate tax forms

May 2018 | 9

Single owner

Full liability

Owner or employee managed

Individual

Local licenses and registrations

Owner-funded

Owners/ Members

Liability

Management

Tax Treatment

Documents

Investment

Unincorporated Sole Proprietor

Operations Business Structure

Partner-funded

Operating agreement

Pass-through to partners

Partners or employee managed

Full liability except in case of LLP

Two or more individuals

Partnership Unlimited shareholders

Corporation

Maximum 100 shareholders

S Corporation

Member-funded

Articles of organization Operating agreement

Pass-through to members

Member (owner) or employee managed

Pass-through to shareholders

Officers have day-today management

Ability to issue stock

Bylaws Shareholder or board resolutions

Shareholder list (cap table)

Ability to issue to stock to maximum of 100 shareholders

Shareholder list (cap table)

S-corp election Articles of incorporation

Bylaws Shareholder or board resolutions

Articles of incorporation C-corp + IRS/state

Corporate tax rate + individual taxes on dividends

Officers have day-today management

Board of Directors has Board of Directors has corporate responsibility; corporate responsibility;

Limited personal liability Limited personal liability Limited personal liability

Unlimited members

LLC

Cheat Sheet