Starting a business in Kentucky is an exciting time filled with many important decisions to make. One of the most important decisions you need to make early on is which legal structure or entity to choose.
The right legal structure will depend entirely on the specifics of your business and affect everything from your taxes to your record keeping to your personal liability and more. The Small Business Administration (SBA) advises on choosing your legal structure carefully as changing it in the future could result in serious or unintended complications.
Several of the most common business structures include:
When you are the sole owner in your business, a sole proprietorship could make the most sense for you and offers a fairly simple structure. With this option, you will report profits on your individual tax return.
Whether you choose to start a business with a family member, friend, former coworker or more, a partnership could be a great way to split ownership among multiple owners. With this, partners split profits and report them on their tax returns. You may choose between a limited partnership, in which just one partner has unlimited liability, a limited liability partnership, in which all owners have limited liability or more.
Limited liability company (LLC)
An LLC is an interesting mix of both a partnership and a corporation. While it protects the personal liability of the owners, or members, the SBA states that it allows both profits and losses to pass through to members’ personal incomes without facing potentially high corporate taxes.
A corporation, or C Corp, offer owners the strongest protection from personal liability. However, this comes at a higher cost than other business structures. As its own separate legal entity, the SBA states that C corps can make profits, pay taxes and face legal liabilities. These can also have unlimited shareholders and several classes of stock.
An S corporation, another type of corporation, is similar to a C corp yet it can only have 100 shareholders and one class of stock. Uniquely, all shareholders must be U.S. citizens. Shareholders have limited liability and get taxed on their personal tax returns.
Depending on your business, you may have additional options. Work with your tax, accounting and legal professionals to decide on the right option for your business to succeed both starting out and in the coming years and decades.