If you operate your business as a Sole Proprietorship or Standard Partnership (“Informal Structures”), you may be carrying unnecessary risk to your personal assets and forfeiting certain tax savings. When comparing structures for a new business, one should consider a number of factors:

1.    Formation and Compliance Requirements

Informal Structures do not require state filings for formation, but LLC’s are easy to form and maintain. Most states have simple regulations for operating an LLC.

2.    Taxes

Both Informal Structures and LLC’s are “pass-through entities” and therefore avoid the double taxation faced by corporations. All business income is reported on the members’ (owners) individual tax returns. Informal Structures are ineligible to elect to be taxed as an S Corporation. LLC’s are eligible and this election could result in tax savings. Owners of both Informal Structures and LLC’s are subject to self-employment tax. For LLC’s, this tax may be reduced for high earners.

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3.    Capital/Investors

As your business grows, you may need additional capital. If your business plans to expand ownership or seek a loan, investors and lenders are more likely to invest or lend to LLC’s.

4.    Ownership/Management

LLC’s offer flexibility as to management structure. Your business can be operated by members (owners) or by a manager or managers who are elected by members.

5.    Risk/Liability

There are inherent risks associated with operating a business. If your business operates as an Informal Structure and is in debt or subject to a lawsuit, your personal assets may be at risk. Informal Structures offer no separation between business and personal assets. LLC’s derive their name –“limited liability” companies – from the fact that, if properly operated, the structure limits liability to business assets.

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If you are weighing the proper structure for your business, contact us today for a free consultation.