So you’ve decided to start your own business. Congratulations! You already know what product or service you want to offer, so step one is out of the way. The next big decision is which business structure is right for you.
There are different formations to choose from, which means that no single structure fits every startup. You need to consider factors such as:
- Whether other people are closely involved—do you have a partner?
- What type of financing you need
- Tax implications
- Will you have shareholders?
- And many more
To give you a basic understanding of each business structure, we’ve provided a brief overview of the different types below.
According to the U.S. Small Business Administration, over 70% of American businesses are sole proprietorships. They’re simple to set up and you have complete managerial control. However, you are also personally liable for all of the company’s financial obligations, which can put your personal assets at risk unless you obtain appropriate insurance coverage.
- Unlike some other formations, there are no administrative requirements, such as passing resolutions and maintaining meeting minutes
- Taxes are reported on your personal income tax forms
- If you pass away, the business essentially ceases to exist unless a solid estate plan is in place
- If you are operating under a trade name, Georgia law requires you to register in the county where most of your business will be conducted
With a general partnership, two or more people agree to share in the profits and losses of the company as per the terms of a partnership agreement. Both profits and losses are ‘passed through’ to each partner to report on their respective income tax returns. Like sole proprietorships, each partner is personally liable for business financial obligations.
- Issues of which partner has control of what should be addressed in a partnership agreement
- Interest in a general partnership cannot be transferred without the consent of the other partners, unless a right to profits is being transferred
- Like sole proprietorships, there are no administrative requirements
- If one of the partners dies or leaves the company, the general partnership is dissolved
A limited partnership consists of both general and limited partners. The difference between a limited partnership and a general partnership is that limited partners can invest in the company and share in the profits without incurring liability for the business’s debts and obligations. In Georgia, limited partners may also control the business while avoiding personal liability. Each partner is taxed upon their share in the profits unless the partnership chooses to be taxed as a corporation.
- Limited partnerships in Georgia must register with the Secretary of State, but typically do not have administrative requirements
A corporation is an entity formed to conduct business. Formation occurs by filing certain documents with the Secretary of State. The biggest advantage of corporation status is that the shareholders avoid personal liability, while the main disadvantage is the formation expense and the extensive record-keeping requirements.
There are two corporation types:
- C-Corps: C-corps are taxed separately, filing corporate tax returns. They can also face a double taxation situation if the owners receive corporate income as dividends, which are treated as personal income. Tax on corporate income is paid at both the corporate level and the individual level. There are no restrictions on ownership.
- S-Corps: S-corps are pass-through tax entities whose profits and losses are reported on the owners’ personal tax returns. Unlike C-corps, S-corps are limited to 100 shareholders, all of which must be American citizens or permanent residents.
- A corporation may exist indefinitely, regardless of individual shareholder status
- There are three different positions: shareholders, directors, and officers (in a smaller corporation, one person can assume all three roles)
Limited Liability Company (LLC)
The LLC is a type of hybrid partnership that allows you and the other owners to benefit from the advantages of both corporations and partnerships. It is created by filing articles of organization with the Georgia Secretary of State and must have an operating agreement that determines the conduct of the business.
Profits and losses can be passed through to owners (unless you opt to be taxed as a corporation), who are also protected from personal liability.
- An LLC may exist indefinitely, regardless of individual owner status
- Ownership interests can be transferred easily from one member to another
No matter which business formation you choose, it is important to discuss formation, taxation, and other key matters with an experienced Georgia business law attorney. The Price Boyd Law Firm is pleased to support the success of both startups and established businesses throughout the metro Atlanta area, so contact us today.