Despite what online business formation services want you to believe, forming a business is a complicated process, and mistakes can be costly for owners and companies, both now and in the future. With the numerous legal requirements, seeking guidance from a qualified business attorney will help you pave a solid foundation for your business venture.
When you choose Allegis Law, you gain access to a trusted business lawyer with extensive experience. Business and tax attorney Rustin Diehl understands all aspects of business formation, from choosing the right business structure to drafting and filing the necessary legal documents - and ongoing general counsel as your business grows.
Your business may have a real shot in today’s market, but you may not know where to start, or how to structure your company, and that’s where Allegis Law comes in.
When done correctly, proper business formation can greatly improve your company’s viability and growth potential. However, a business formed without following the fundamentals can create unnecessary personal liability and costly legal disputes.
Selecting the best tax status for your business can result in significant savings and greater profits.But making the best decision requires more than checking the right box on IRS forms. You need to understand the pros and cons of each tax status.
| Tax Status | Pros | Cons |
|---|---|---|
| Sole Proprietorship (Single-Member LLC Default) |
|
|
| Partnership (Multi-Member LLC Default) |
|
|
| S-Corporation |
|
|
| C-Corporation |
|
|
Each business structure has unique legal and tax implications that must be carefully evaluated. While forming a state law partnership or traditional corporation used to be the norm, the modern approach is forming a Limited Liability Company (LLC) for its flexibility.
An LLC can be structured as a sole proprietorship, partnership, S corporation, or C corporation. No matter which structure you choose, your LLC operating agreement must be tailored to meet your objectives.
The IRS breaks domestic business structures down into several basic categories.
A business that is classified as a sole proprietorship is one in which an individual owns the unincorporated business on their own. This is different than when there is a sole member of a limited liability company (LLC) who treats the company as a corporation. When this is the case, the business – although it has a sole proprietor – is not a sole proprietorship. In a sole proprietorship, there is no dividing line between the sole owner and the business itself.
The owner is entitled to all the profits, but they also bear responsibility for business losses and liabilities.
A partnership is much like a sole proprietorship except that – instead of having one owner – there are at least two owners who are partners in the business. Each of the partners contributes to the business in the form of money, labor, skill, property – or any combination of these – and all the partners share the business’s profits, losses, and liabilities in accordance with their ownership.
Common partnership structures include general partnerships (discussed above), limited liability partnerships, and limited partnerships
Professionals, such as accountants, architects, lawyers, and medical providers, often turn to limited liability partnerships for increased control and more limited financial liability. This structure allows partners to limit their liability in relation to one another, which means that if one partner is sued for malpractice – for example – the other partners’ assets won’t be jeopardized. The partners, however, retain the authority or control to guide how they run the business via consensus between themselves.
Limited partnerships blend the characteristics of general partnerships and limited liability partnerships. In a limited partnership, at least one partner must be identified as a general partner, which means they must take on full personal responsibility for the partnership’s debts. Additionally, at least one of the other partners must be a silent partner whose liability is limited to the amount they invest in the business.
Corporations are legal entities that are distinct from their owners. The corporations themselves, however, retain many of the same legal rights and responsibilities that sole proprietors have, including:
A primary difference, however, is that shareholders in corporations experience more limited liability than sole proprietors and partners do. A corporation’s shareholders aren’t personally liable for debts the corporation assumes, but they can profit through corporate dividends and stock appreciation. Nearly all large companies are corporations, and many much smaller businesses also choose this versatile business structure.
Within the category of corporations, it’s important to distinguish between S corps and C corps. S corporations choose this classification as a means of passing their corporate income, losses, deductions, and credits through to their shareholders’ individual federal income tax returns. S corporations avoid double taxation – at the corporate and individual level – on the profits they generate.
C corporations, on the other hand, are recognized as separate tax-paying entities. As such, C corporations are taxed twice for profits, which are either distributed as dividends or are realized as capital gains. This results in double taxation - being taxed at the business level and again at the shareholder level.
Advantages related to the C-corporation structure generally apply to businesses with a large number of shareholders, to businesses with international ownership, and to businesses that seek more flexibility in terms of taxation. Corporations with more than 100 shareholders aren’t eligible for the S corporation structure and must be formed as a C corp.
If multiple owners come together, forming your business should include a detailed look at ownership structure options. The ownership structure defines who has a stake in the business, who has decision-making authority, who shares in the profits and under what terms, and who is personally liable for debts and obligations. Choosing the right structure depends on your long-term goals, level of personal involvement and contribution to the business, and your desired protection from liability.
The degree of control or autonomy will play a critical role in determining your company’s structure. Sole proprietorships afford the most control, but an S corporation with only one shareholder provides the same degree of decision-making authority while limiting the sole shareholder’s liability. As corporations grow in size, however, the ability of their original owners to control how they are operated is more limited.
Each business structure comes with its own distinct level of liability. While some offer far more protection from financial risk, this generally comes with diminished control over the business itself. Finding the right balance of control and liability for the individual or entity that is creating the business is an important piece of the puzzle.
Sole proprietors have the luxury of making the decisions that they believe are best for their businesses, but they are also solely responsible for their companies’ debts and liabilities – and they put the owners’ personal assets at risk. In limited partnerships, on the other hand, partners must reach compromises in relation to how they run their business, but each partners’ personal liability is limited to the amount they’ve invested in the business – rather than all of their personal assets being at stake.
The more complex a business’s structure is, the more challenging its administration. When a business is structured as a sole proprietorship or partnership, there are few reporting obligations and little paperwork involved. In contrast, corporations face strict reporting requirements, and the process of forming the corporation and running it is also more complex.
©
2025
Allegis Law, LLC. All Rights Reserved.
