How to choose a business structure

On Behalf of | Sep 21, 2020 | Business Law

If you are planning to start a company in Pennsylvania or any other state, it is important to know how the company will be structured. Your options include operating as a sole proprietor, forming a partnership or forming a corporation. It may also be possible to use the limited liability company or limited liability partnership structures.

The pros and cons of operating as a sole proprietor

As a sole proprietor, your business income will be reported on your personal tax return. This means that you don’t need to file a separate corporate tax return or worry about double taxation. However, your personal assets may be at risk if a customer or vendor obtains a judgment against the business.

If liability issues are a concern, it may be in your best interest to consider using the LLC structure. This allows you to operate as a sole proprietor for tax purposes while also potentially shielding your assets from being seized in a lawsuit.

What to consider before forming a corporation

Corporations are separate entities from their owners, which means that only the company’s assets can be used to satisfy a judgment. It may also be possible for corporations to retain earnings without being taxed on that income. Another benefit to operating under this structure is that it may be easier to raise funds that can be used to grow the business.

However, it is important to note that you will need to file both a business and personal income tax return each year. It will likely be necessary to hire legal and accounting professionals to remain in compliance with state and federal laws. Smaller companies may want to consider operating as an LLC that is taxed like an S corporation.

If you are in the process of starting a company, it may be a good idea to speak with a business law attorney. Your attorney may be able to provide insight into the different types of organizational structures that are available and why they might meet your company’s needs.

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