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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   July 2004

Legal Structure Basics

(Reprinted with permission from “Building Business Briefs,” National Association of Home Builders)

Whether you are starting a home building or remodeling business, thinking of reorganizing your company or want to start a new division, it’s important to consider the pros and cons of various types of legal structures (also known as business structures).   A legal structure:

  • Affects the business and the owner on a state and federal level.
  • Affects the way the business and the owner pay taxes.
  • Has legal implications affecting liability exposure.
  • May impact your ability to get insurance, borrow money, lease space and hire employees.

To select the right legal structure for your company, consult your attorney and your accountant. These professionals can advise you, based on your specific needs. While the rest of this article is not intended to be legal or tax advice, here’s a quick overview of some common types of legal structures for small businesses.

Under a Sole Proprietorship structure

  • There is one owner of an unincorporated business.
  • All profits and losses are reported and taxed on the owner’s personal tax return.
  • Liabilities are the personal responsibility of the owner.

Under a Partnership structure

  • Two or more people own an unincorporated business.
  • The partners control the business jointly.
  • The business files its own tax return, but the profits and losses are taxed on the partners’ personal tax returns.
  • Profits and losses are shared among the owners, based on their partnership agreement.
  • Each partner individually bears full responsibility for all of the liabilities of the business.

Under a Corporation structure

  • The business is a legal entity separate from its owners (stockholders).
  • The business files its own tax returns.
  • For tax purposes, a corporation may be a C-Corp or a S-Corp. A C-Corp pays its own taxes. A S-Corp is taxed like a partnership.
  • Stockholders have some protection from the liabilities generated by the business.

Under a Limited Liability Company (LLC) structure (which is a hybrid of a partnership and a corporation)

  • Ownership percentages, profit and loss distributions and voting powers are defined in an agreement.
  • The business files its own tax returns but offers the same tax advantages as a partnership.
  • The business provides the owners with some protection from the liabilities generated by the business.

I cannot emphasize enough how important it is to seek help from a professional when evaluating and selecting a business structure. What may be right for your friend or neighbor may not be right for you. Moreover, a legal structure that may be beneficial from a tax perspective may be negative from an operations perspective. That’s why it’s best to consult a trusted professional to help you to make the final decision.


 


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