Back on Sept. 12, we discussed some of the steps involved in forming a new business in Illinois. That blog post mentioned that there are several ways to organize a business. Each form has different advantages and disadvantages, and it could make a big difference some day if anyone ever sues your business for some reason.
The most common business structures are:
- Sole Proprietorship. As the name implies, this type of business has a single owner. Starting a business as a sole proprietorship is simple, but you are totally responsible for any court judgments, debts or tax bills laid on the business.
- Partnership. A partnership is the same as a sole proprietorship, except that more than one person owns the business. All partners can be held personally responsible for the business’ debts, judgments and taxes.
- Limited partnership. Unlike a partnership, a limited partnership has a hierarchy of ownership. “General partners” run the business day to day, and bring on “limited partners.” The general partners are personally liable for the business, unless it is a corporation or LLC.
- LLCs and Corporations. Businesses with more potential for growth — and legal problems — will likely benefit from forming as a corporation or an LLC. A corporation sets up the business as a separate legal entity. The owners are not liable for judgments, and only must pay income tax on the salaries, dividends and bonuses they draw for themselves. An LLC, however, is not a separate entity for tax purposes.
As the type of business structure you choose becomes more complex, the process of starting the business may also become more of a challenge. Consulting with a business law attorney can help new business owners avoid pitfalls.