One of the most important considerations when choosing a business structure are the tax implications that come with the choice of structure. While no one entity type is efficient for all purposes, various factors can be assessed to determine the best plan for your business. When looking to form an entity within which to run your business, a business owner should look at certain factors: your state of incorporation, your state of actually doing business, industry, and need for liability protection. These factors must be carefully evaluated when structuring your business.
What Types of Business Structures Are There?
A business structure is the way in which a company is legally organized. While the formation you choose may not have much impact on daily operations, structure is vital for the purposes of defining ownership, paying taxes, limiting personal liability, and future expansion. Even if you start out as a sole proprietor, the structure you choose may have certain tax benefits and changing to a different structure as your business grows may have certain trade-offs.
The common types of business structures are as follows:
- Sole proprietorships
- Limited Liability Company
- Corporation making an S-Election (S-Corps)
- Corporation making an C-Election (C-Corps)
Each form carries with it various pros and cons. Each structure should be assessed in accordance with your long-term business objectives. Each state has its own paperwork and legal requirements when forming a business entity. As a business owner, you need to be aware that just because you’ve complied with the requirements in one state, you may still need to register in additional jurisdictions by filing a foreign qualification.
Factors to Consider When Forming a Business
Your company’s business structure can have long-term legal and financial ramifications for your business’s operations. Business owners must pay federal, state, and local taxes to remain in good standing. Depending on the business, you may also need to pay state and local sales tax and payroll tax. Although there is a myth that there is a tax-efficient business structure for every company, that is false information. Every structure is either tax efficient or not — and the structure selected must be specifically tailored to your needs.
The type of entity you choose plays a role in the taxes you are obligated to pay. It’s important to note that if your business operates in multiple locations, you may have tax obligations in each — and what may be tax efficient in New Jersey may be tax prohibitive in New York City. When choosing a structure, it’s also critical to understand that while the S-Corp structure is a perfect flow-through in many places, New York City does not recognize this election.
Liability issues are another essential consideration when forming a business entity. Each structure offers different levels of protection. For instance, in a corporation, an S-corp or a Limited Liability Company, only the entity itself can be sued. In a limited partnership, partners only have liability for the business’s debts up to the amount they invested, and the general partner holds the unlimted liability. In a limited liability partnership, the partners are not responsible for each other — rather, they have unlimited personal liability for the company’s debts.
Contact an Experienced New York Business Formation Attorney to Learn More
There are many complexities when it comes to structuring a business — if you don’t choose the proper entity, you may be subjected to unintended tax and legal consequences. It’s best to have a knowledgeable business attorney on your side who can advise you regarding the structure that will help you meet your goals. Brinen & Associates is dedicated to providing strategic advice to entrepreneurs and business owners for entity formation matters and a wide variety of business issues. Call (212) 330-8151 or send us a message to learn more about how we can help.