How to Choose the Right Business Structure

Entrepreneurs in Boulder and Kansas City have four primary legal structures from which to choose when starting a new for-profit business. There are more than this, but you will almost certainly pick one of these four.

Sole Proprietorship

If you run a business on your own without filing anything with your Secretary of State, you’ll be a Sole Proprietor. All income and losses will pass through to your personal tax return. This is perhaps the simplest form of business and is sometimes ideal for freelancers, especially since you can use it to write off some business expenses. If your business is really just a side business and you don’t do much with it, this may be a perfectly fine business structure. However, the down side is you’ll be personally liable for all debts and liabilities of the business. For that reason and others, it is usually best to create an LLC or Corporation in Colorado, Missouri, or Kansas (or elsewhere).

Partnership

Partnerships are a lot like Sole Proprietorships–but with two or more individuals. Partnerships were extremely popular for a long time but have become less common for new businesses since 1998. In Colorado, Missouri and Kansas, entrepreneurs can create a Partnership without filing anything with their Secretary of State (see this guide to learn about Accidental Partnerships and why you should avoid them), however, the preferred way to create a Partnership is to file formation documents with a Secretary of State. Also note that there are many different kinds of Partnerships, each with different filing requirements.

All Partnership income and losses will pass through to the owners and each owner will report his or her share on their personal tax return. However, a big drawback with Partnerships is that all partners will be personally liable for all debts and liabilities of the business (unless they receive some form of “limited liability” from their Secretary of State).

Limited Liability Company (LLC)

An LLC is kind of a hybrid between Partnerships and Corporations and is usually the go-to business structure for entrepreneurs today. It can have one owner or multiple owners. To create an LLC in Colorado, Missouri, or Kansas, you must file documents with the Secretary of State.

LLCs are extremely flexible. For example, an LLC can choose how it and its owners will be taxed. Further, unlike Sole Proprietorships and Partnerships, the owners are not personally liable for the debts and liabilities of the business (unless your veil is pierced). (Also note, if you form an LLC and need to change to a Corporation later, there are ways to accomplish that).

Corporation

Corporations are the most formal business structure. They can have just one shareholder or many shareholders. To create a Corporation in Colorado, Missouri, or Kansas, you must file documents with your Secretary of State.

Like LLCs, a Corporation’s shareholders receive limited liability and are not personally liable for the debts and liabilities of the business. However, Corporations have two primary downsides. First, there are many formalities you must follow, at least when compared to LLCs. And second, Corporations are subject to “double taxation.” That means the Corporation will pay taxes on its income, then its shareholders will pay taxes on distributions they receive.

However, there are certain situations where forming a Corporation (or converting your existing business into a Corporation) makes sense. This is largely true if you are raising investment from professional investors.

A Note About S-Corps

An S-Corp is not a business entity. It is just a tax classification. For more, check out this guide.

(This article is general in nature and is not legal advice.)