Cattaraugus County Business Development Corporation

What do I need to know before I make my business structure decision?

NOTE: The CCBDC offers this information for you to familiarize yourself with various business structures. The business structure you choose for your new business has both legal and accounting implications. WE STRONGLY RECOMMEND THAT YOU DISCUSS YOUR DECISION WITH BOTH YOUR LAWYER AND YOUR ACCOUNTANT BEFORE YOU FORMALLY STRUCTURE YOUR BUSINESS!!

Selecting a business structure is one of the most important business decisions business owners will make. Your business structure affects the safety of personal assets, smooth continuation of the business upon ownership change and has differing tax implications. You should familiarize yourself with what each structure will -and won't -do for your business.

Business Structure Options:

  1. Sole Proprietorships
  2. General Partnerships
  3. Limited Liability Partnership (LLP)
  4. Limited Liability Corporations (LLC)
  5. Corporations
    • Subchapter S Corporations

Many businesses start out as sole proprietorships or partnerships. After you review the impact of your structure choice, you can easily understand why we recommend you discuss your chosen option with your lawyer and your accountant.

A sole proprietorship or partnership-structured business can move to incorporation, but cannot move back to a sole proprietorship or partnership. If the business no longer exists, resolutions to dissolve the corporation must be filed with New York State.

There are five factors you need to consider before choosing your business structure:

  1. Protection of personal assets

    Sole proprietors and partners have unlimited personal liability for business debt or law suits against their company. Creditors can attach homes, cars, savings or other personal assets. Incorporating or forming an LLC (Limited Liability Company) helps separate your personal identity from your business identity. Corporation shareholders or LLC members have only the money they put into the company to lose.

  2. Taxation

    For sole proprietors and partners, company profits / losses pass directly through to their personal tax returns. For corporations, profits are taxed, then the profits that are distributed to shareholders as dividends are taxed again on the personal level. This "double taxation" can be avoided while still enjoying the benefits of personal asset protection by forming an LLC or incorporating as an "S" Corporation.

  3. Tax Deductible Employee Benefits

    Incorporating for forming an LLC usually provides tax-deductible benefits for you and your employees, an advantage that sole proprietors and partners do not typically enjoy. Even if you are the only shareholder or employee of your business, benefits such as health insurance, life insurance, travel and entertainment expenses may now be deductible (talk to your accountant!). Corporations and LLCs usually provide an increased tax shelter for qualified pensions or retirement plans (i.e. 401Ks).

  4. Uninterrupted business

    Sole proprietorships and partnerships may automatically end or become legally entangled when one owner dies or retires. Corporations and LLCs are enduring legal business structures. They may continue regardless of individual officers, managers or shareholders. Corporation ownership may be transferred, without substantially disrupting operations, through sale of stock.

  5. Access to Capital

    Sole proprietorships and partnerships may find investors hard to attract because of personal liability. Investors are more likely to purchase shared in a corporation where there is separation between personal and business assets.

Where to learn more: