What Business Structure Should You Choose?

If you’re starting a business, one of the first decisions you will need to make is what business structure should be used. The type of entity you select can impact all aspects of your business operations — from the paperwork you need to file, how much you pay in taxes, your ability to raise capital, and your personal liability. Each form is best for different business goals, so it’s essential to make sure you structure your company in a way that is most appropriate to satisfy them.

North Carolina recognizes the following types of business structures:

Sole Proprietorship

A sole proprietorship is typically the easiest business structure to form. In fact, many businesses might start out as sole proprietorships without even knowing it. This is a one-person entity that does not require paperwork or registration. It is simply created by going into business for yourself.

A sole proprietorship cannot be separated from its owner — the business and owner are the same. The owner reports business taxes on their personal tax return and can be held personally liable for any business-related debts or judgments.

One of the biggest advantages of a sole proprietorship is the ease with which it is formed. In addition, this structure allows you to retain all of the profits you make and retain complete control over your business. But while the informal nature of a sole proprietorship makes it simple, there can be substantial benefits to formally organizing your business.

General Partnership

A general partnership is similar to a sole proprietorship, except that the company is owned by two or more people. No paperwork is required to form a partnership and the owners pay taxes on their share of business income on their personal income tax returns. Each partner has personal liability for the full amount of any business debts or claims.

Some of the benefits that come with a general partnership can include low maintenance costs, straightforward division of losses and profits, and pass-through taxation treatment. While they are easy to form and may work for some short-term types of business ventures, it is vital to note that partnerships can come with several drawbacks. For example, there can be limited opportunities to raise capital and problems with transferring business ownership. In addition, state law will make certain assumptions about the ownership and structure of the partnership that may not match what the partners have agreed upon. In that case, without a written agreement, the assumptions may override the partners’ agreement.

Corporation

A corporation is the most complicated business structure to form and operate. Importantly, this type of entity allows for complete personal liability protection for its owners and shareholders. A corporation can be formed by filing the Articles of Incorporation, drafting corporate bylaws, and selecting directors.

Forming a corporation comes with several advantages, including easy transfer of ownership, better access to funding, certain tax benefits, and business continuity. However, the most critical aspect of a corporation is limited personal liability. Since a corporation is a separate legal entity, it is responsible for its own debts — creditors are only entitled to go after the assets of the corporation, rather than the personal assets of shareholders, directors, and officers.

Limited Liability Company

Forming a limited liability company (LLC) can be a good choice for business owners who wish to have personal liability protection and avoid double taxation. This type of structure combines the limited liability of a corporation with the flexibility of a partnership or sole proprietorship. An LLC business structure can be ideal for a variety of business types and owners seeking to limit their liability. An LLC can be member-managed or manager-managed. Members can choose whether to be taxed as a partnership or corporation.

LLCs are inexpensive to form and easier to maintain than corporations. They are not required to have a board of directors or hold shareholder meetings, but they must file an annual report with the North Carolina Secretary of State. To form an LLC, a name must be selected that is distinguishable from the names of business entities that are already on file with the Secretary of State and a registered agent must be appointed to accept service of process within the state. Additionally, Articles of Organization must be filed with the Secretary of State.

Contact an Experienced North Carolina Business Attorney

If you’re an entrepreneur, it’s essential to ensure you choose a favorable business structure. However, the steps to take to form a business can be confusing and it’s best to have a knowledgeable attorney by your side to help you navigate the business formation process. The attorneys at Carolina Tax, Trusts, & Estates assist North Carolina entrepreneurs with choosing a structure for their company that will help them achieve success. We welcome you to contact us for a complimentary consultation to learn how we can assist you.