When you’re going into a new business enterprise, one of the most important questions to ask centers on the legal structure you’ll choose for your company. What are the pros and cons of the different business forms? How can you know what’s best for you?
The simplest legal structure is the sole proprietorship. Obviously, it will only apply if you are in business for yourself. You may need to obtain a business license and you will want to register the name of your business, if you are doing business under a name other than your own. For tax purposes, all income derived in a sole proprietorship is recognized as ordinary income on your personal income taxes, though you can also offset income with any business expenses. For liability purposes, there is no shield. Your personal assets can be attached to satisfy the debts of the business.
In Pennsylvania, you don’t need to prepare and execute a partnership agreement to enter into a legally enforceable partnership. If you conduct business for profit with another person, it’s a partnership. In a partnership, each partner is “jointly and severally” liable for all the debts of the partnership. That means that you can be held responsible for any obligations incurred by a partner and your personal assets can be taken to satisfy a judgment. Any income received by the partnership will be divided equally by the partners and will be recognized as ordinary income.
A corporation is a separate legal entity. To establish a corporation, you must prepare and execute articles of incorporation, which must be filed with the state. When you create a corporation, you limit your liability to the amount of your investment in the corporation. The tax consequences of any income earned by the corporation will differ, based on the type of corporation. With a Subchapter S corporation, the income will pass through to you as ordinary income. With a Subchapter C corporation, there’s a corporate tax and income is passed on in the form of shareholder dividends, which may be taxable to individual shareholders.
Limited Liability Companies
A limited liability company offers the advantages of a corporation without a lot of the annual filing requirements. Your liability will be capped at the amount of your investment. Any income will pass through to you as ordinary income.
At Barnard, Mezzanotte, Pinnie, Seelaus & Kraft LLP, we offer experienced and knowledgeable legal counsel to individuals in Pennsylvania. To set up an appointment for a free initial consultation, call us at 610-565-4055 or 302-594-4535 or contact us online