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What business structure is right for you?

On Behalf of | Jan 14, 2025 | Firm News

Starting a business is a goal for many Nebraska residents. If you are starting a business, one of the first decisions you will make is what type of business structure to set up.

This is an important decision. Each type of business structure has benefits and drawbacks that you should consider.

Sole proprietorship

A sole proprietorship is the simplest business structure. You do not need to take any steps to become a sole proprietorship. If you do not register your business with another structure, you are automatically deemed a sole proprietorship.

Sole proprietorships are a good idea for new low-risk businesses and business owners who want to try out running a business before deciding if it is something they want to continue pursuing.

The main disadvantage of a sole proprietorship is that business and personal assets and liabilities are not separate. This means that your personal assets can be garnished to pay your business debts. Additionally, banks are sometimes hesitant to lend to sole proprietorships, making it harder to get your business going.

Partnerships

A partnership could be a good idea if you are going into business with someone else. You can set up a limited partnership or a limited liability partnership.

A limited partnership has one partner with unlimited liability. That partner also has the most control over the business. The other partner has limited control over the business, but also limited liability.

A limited liability partnership (“LLP”) works almost the same way as a limited partnership. The difference is that all partners in an LLP have limited liability, which protects everyone from having personal assets used to pay business debts.

Your personal assets or bank accounts will be protected from creditors and bankruptcy and cannot be garnished if you are sued, provided corporate formalities are observed.

Limited liability company

Another option is a limited liability company (“LLC”). A primary benefit of an LLC is it protects you from personal liability. Your personal assets or bank accounts will be protected from creditors and bankruptcy and cannot be garnished if you are sued, provided corporate formalities are observed.

An LLC allows you to pay a lower tax rate than you would if you formed a corporation. However, LLC members are considered self-employed and therefore must pay self-employment taxes.

An LLC may also be structured as an S corporation for tax purposes in certain situations, which may provide a tax benefit in certain scenarios where self-employment taxes may due on the member’s income from the LLC.

Corporations

Forming a corporation is another option. A corporation is a separate legal entity from you and any other owners. This is a huge benefit, since a corporation offers the strongest protection from personal liability.

It is easier to raise funds with a corporation through the sale of stock. This can make it easier to obtain funding and retain employees.

However, forming and running a corporation is more complex than other types of business structures. Corporations require extensive record keeping and reporting. Forming a corporation is a good option if you need to raise money for your business or plan on eventually selling your business.

There are various types of corporation structures to choose from, such as an S corporation, a close corporation and a benefit corporation. If you want to set up a corporation, it is best to thoroughly research each type to learn which is right for your situation.

Think carefully about your short and long-term business goals before choosing a business structure. The type of structure you select can make a huge difference in the success of your business.