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Choosing the right structure for a new business

On Behalf of | Jan 23, 2023 | Business Law

Entrepreneurs in Pennsylvania and around the country make many decisions when they start new commercial ventures, and one of the most important of them is choosing which legal structure their businesses should have. Sole proprietorships, partnerships and corporations are the most common business entities, but limited liability companies are gaining in popularity. Two of the most important considerations when comparing business structures are tax rates and liability protection.

Tax rates

Under U.S. business law, sole proprietors and partners declare their business profits and losses on their personal income tax returns. Partnerships are required to submit tax returns, but they rarely pay taxes. C corporations submit tax returns and pay taxes on their profits, and their shareholders pay personal income tax on any dividends they receive. Setting up an S corporation avoids this double taxation as profits flow through to shareholders and are declared on their personal returns. LLCs have become a popular business structure because they also pay taxes in this way and are easier to set up than corporations.

Liability protection

Just about every company is sued sooner or later. Sole proprietors enjoy no asset protection, and partners are jointly and severally liable for any obligations or debts the business incurs. This means their personal assets could be pursued by plaintiffs who sue their businesses successfully. C corporations do not offer entrepreneurs much in the way of tax benefits, but they do provide them with the most robust liability protection. The separation between business and personal assets is known as the corporate veil, and it is very difficult to pierce. S corporations and LLCs also offer liability protection.

Weighing the benefits

Entrepreneurs are usually optimistic people, which means they tend to focus on positives rather than negatives when they start new businesses. Setting up a sole proprietorship is quick, easy and avoids double taxation, but business owners who choose this path could lose their personal assets if their companies are sued or are unable to pay their debts. Corporations and LLCs protect personal assets behind the corporate veil, and they may also provide tax benefits.