Small Business Formation - Why Your Business Structure Matters

If you’re one of the many small business owners who thinks estate planning is for wealthy, large business owners and executives, perhaps even multi-millionaires, think again.

Regardless of the size of your bank account or the size of your business, estate planning can be beneficial for everyone, especially for the small business owner. For many small business owners, their livelihood and family’s security are largely dependent upon the success of their business. Proper estate planning for small business owners can help protect both personal and business assets from creditors. Part of that planning involves how you choose to organize your business. The business structure you choose can also have a major impact on your taxes. You would be wise to review your business organization options to ensure your current or proposed business structure provides you with the best tax and asset protection.

Here’s a quick look at some of the business organizational options that are available in the state of Kansas:
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• ​​​Sole Proprietorship. A sole proprietorship is a business with a single owner. There is no separation between your business and personal assets with this type of structure. This means that your personal assets could be at risk if your business is sued and found to be at fault. This type of business is less optimal for most, as it provides little to no tax and liability protection. One upside to this type of business is that there are no annual state filings and no required annual organizational upkeep.
• C-Corporation. Any business that is “incorporated” is automatically categorized as a C-corporation, unless the business files forms with the IRS electing to be taxed otherwise. With this type of entity, you do separate your business assets from your personal assets for liability and creditor purposes. Your business assets, owned under the name of the business, are taxed at a corporate income tax rate. Any distributions of income from the business to the owners is then taxed again as personal income. Annual filings with the Secretary of State where the business is incorporated, as well as any states that it does business in, are required. The business should also have meetings annually that it memorializes in minutes signed by the stockholders and directors of the business. A C-corporation is a good fit for those owners with high income tax rates, or who want to attract investors and foreign ownership.  

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• S-Corporation. An S-Corporation, like a C-corporation, is simply classified as a “corporation” and, thus, has much of same annual upkeep required of it. What differentiates it, is the filing of forms with the IRS electing to be taxed as a pass-through entity under the Subchapter S rules of the IRS Code. This means that business profits pass through to the owner’s personal income for taxation purposes (this eliminates the double taxation when the profits are distributed to the owners). S-corporations are best suited for small businesses, particularly those that are looking to avoid self-employment taxes.
  
• Partnership. When two or more individuals begin to do business together, they can form a business known as a partnership. Profits and losses from the business will be shared according to the ownership shares. A partnership is also a pass-through entity and business profits are taxed at the partners’ individual tax rates. There are very few state requirements for record keeping. However, as in a sole proprietorship, there is no separation between business and personal assets for liability purposes. A limited liability partnership (LLP) can provide some additional liability protection to the partners and is an option for some.
  
• Limited Liability Company. With this form of business structure, the members of the company maintain separation of their personal assets from the business assets. Many clients prefer this type of entity, as it allows them to choose how they would like to be taxed. If they do not file a tax election with the IRS, then they are automatically taxed as a partnership. LLCs, like corporations, are required to file annually with the State they are organized in and any states that they are conducting business. However, annual minutes or meetings are not required and are only considered necessary under certain circumstances, like adding new members or purchasing real estate.

​This list is simply a quick glance at the major differences between business structures. By visiting with your attorney, in coordination with your accountant, you can determine which business entity is the best fit for your situation.

For more information on Small Business Formation and Business Succession Planning contact Davis & McCann, P. A., Dodge City, KS. We are members of Wealth Counsel, a national consortium of Estate Planning Attorneys and Elder Law. We focus our practice on providing clients with the best legal advice on estate planning, Medicaid and Long-term Care Planning, Family Business/Small Business Succession Planning, Probate, Trust Administration, Real Estate Transactions, 1031 Exchanges, and related matters.