Kiritsis & Associates
John Kiritsis, Esq., CPA, MBA, MS, JD, LL.M
Kiritsis Law Group
212 922 0005
Deciding on your business entity structure will influence many aspects of your business, like taxes, daily operations, and personal liability.
The most common business structures are Sole Proprietorships, Partnerships, Limited Liability Companies (LLCs), C-Corporations, and S-Corporations.
A sole proprietorship is a business that has one owner. This entity type does not require filing any forms, begins once you start conducting business, and is an excellent way for self-employed people to start their businesses.
A sole proprietorship offers several tax advantages, including deducting business expenses and the simplicity of filing a single tax return. Any business income generated is passed-through and may be eligible for a 20% tax deduction, according to the TCJA.
The major disadvantage of sole proprietorships is that the owner's personal assets are not protected from liability. If the business is sued, the owner's personal assets, such as their home or car, could be at risk.
A sole proprietor typically does not pay themselves a salary; instead, they can take money out of the business as compensation. This means that they can take money out of the business to cover their personal expenses, as well as any taxes that may be due on the money they make from the business.
According to the IRS, income from a sole proprietorship is considered personal income. All expenses associated with the business are deductible against that income. Since sole proprietors file taxes under their own Social Security number and Schedule C, it is important to have an accountant review your tax returns.
An LLC is often chosen over a sole proprietorship because it offers better liability protection with similar tax benefits. LLCs are also easier to establish and maintain than other business structures.
A partnership is a business structure with two or more people managing and operating a business. The partners share management duties and responsibilities, and they share in the profits and losses of the business.
There are three types of partnerships: General Partnerships, Limited Partnerships, and Limited Liability Partnerships.
Partnerships do not pay income tax. Instead, income is passed through to the partners, which prevents double taxation. This means that the partners are responsible for paying taxes on their share of the partnership's income.
In a General Partnership, all parties share legal and financial liability, profits are shared equally, and each partner is personally liable for the debts and obligations of the partnership. Each partner must report their income and any taxes paid on their income tax returns. This information determines each partner's share of the partnership's profits or losses.
A Limited Partnership (LP) is a business structure in which there is at least one general partner with full personal liability, and all other partners have limited liability to the amount invested. LPs are often used in venture capital and private equity situations, where the general partner is the entity investing the capital and the limited partners are the individuals or entities that provide the capital.
A limited liability partnership (LLP) is a type of business entity in which partners are not personally liable for the debts or liabilities of the business. This structure is typical for professionals like lawyers and accountants who want to protect their personal assets in case the business is sued.
Limited Liability Companies
LLCs have rapidly become the preeminent entity of choice among small and midsize businesses for a number of reasons. LLCs offer flexibility in terms of management and ownership structure, as well as tax advantages. LLCs also provide limited liability protection for their owners, which is a key consideration for any business.
An LLC limits the business owner’s personal liability, protecting their personal assets if the company is sued or files for bankruptcy. This protection is important because the business owner’s personal assets are safe from creditors and other claimants.
The benefits of an LLC are personal liability protection, pass-through taxation, and flexible ownership. LLCs offer owners limited personal liability for business debts and obligations, meaning that owners' personal assets are not at risk in the event that the business is unable to pay its debts. LLCs are taxed as pass-through entities, meaning that business income is taxed at the individual owner level, rather than at the corporate level. This can result in significant tax savings. Finally, LLCs offer flexible ownership structures, allowing for multiple owners and various ownership percentages.
An LLC must be registered as member-managed or manager-managed.
A manager-management structure might be preferable when:
Some members only want to be passive investors, as it would allow for a separation of roles between those actively involved in the business and those who simply provide financial support. This could help to avoid conflicts and allow the business to run more smoothly.
The members are not skilled at management. This can help to ensure that tasks are completed efficiently and effectively, as well as provide clear lines of communication between managers and team members.
The ownership/business is too complex to allow all members to manage the company. This type of structure can help to ensure that decisions are made efficiently and effectively and that the company is run smoothly overall.
A Member-Managed LLC is run by its members (owners). The members are responsible for the business's day-to-day operations. This is the right choice if the members want to be actively involved in the company’s operations. A member-managed LLC may have managers that are not members. It is essential to draft a comprehensive operating agreement that outlines each member's responsibilities in detail. This agreement should include provisions for how decisions will be made, how disputes will be resolved, and what happens if a member wants to leave the group.
This is the most common type of corporation. C-Corps protect the assets and income of the corporation from its owners/shareholders by legally separating them. This means that the owners/shareholders are not personally liable for the debts and obligations of the corporation. An investor or owner is only liable for the amount they invested in the business. Shareholders are subject to double taxation. They must pay corporate and personal income taxes. A C-Corp must follow certain formalities, such as holding regular board meetings, documenting corporate decisions, and maintaining corporate records.
An S-Corp may have only 1 owner and a maximum of 100. As an S-Corp, you may keep all the privileges and protections of a C-Corp without having to deal with double taxation. An S-Corp is only subject to personal income tax.
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