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BUSINESS STRUCTURE

When starting a business, you must choose a business organizational structure. In Wisconsin, you are considered a sole proprietor - by default. However, there are five different business structures from which to choose.

Sole Proprietor

Partnership

"C" Corporation

"S" Corporation

Limited Liability Company or Partnership (LLC or LLP)

Sole Proprietor

In a sole proprietorship, one individual owns and operates the business. S/he is liable for all business debts and actions, and is also the only beneficiary of business profit as well as a "draw-down" of outside income if a business loss occurs. This form of business is very simple to organize, and the owner has total freedom to make decisions. The disadvantage is that there is unlimited liability for the owner, which can extend to personal assets such as home, vehicle, and savings.

Partnership

In a partnership, two or more individuals make a partnership contract with each other and jointly operate a business. Each partner contributes cash, property, and/or services for the purpose of making a profit. This business structure is easy to organize and may have greater financial and human strength than a sole proprietorship. The disadvantages are that there is unlimited liability among the partners, decision making is divided among the partners and the elimination of any partner can result in the automatic dissolution of the partnership.

"C" Corporation

A "C" Corporation has its own legal identity, rights, and liabilities. Stockholders have limited liability, so they are not personally liable for business debts and liabilities. Life of the business is perpetual, and owners enjoy tax-deferred fringe benefits. However, a "C" Corporation is extremely difficult, expensive, and time consuming to organize and is subject to more state and federal controls. Furthermore, the business and the owners are both taxed on the same income.

"S" Corporation

An "S" Corporation is very similar to a "C" Corporation, but approval from the IRS is needed to be taxed as an "S" Corporation. Similar to a partnership, profits or losses are not subject to self-employment taxes and are passed through to shareholders therefore avoiding the double taxation of the "C" Corporation. It also allows the shareholders to have the benefit of offsetting business losses incurred by the corporation against the income of the shareholders. An "S" corporation has the same limited liability as a regular corporation. "S" Corporations cannot have more than 75 shareholders. Also, fringe benefits are restricted and there are limits on contributions to a qualified retirement plan.

Limited Liability Company or Partnership (LLC or LLP)

An LLC/LLP is a hybrid structure with unique taxation qualities, depending upon the Federal tax designation chosen on the initial filing. This business structure can combine the pass through of profits like a partnership, with the limited liability of a corporation. An LLC or LLP offers a broader financial protection for its' owners by setting rational limits to the exposure of the "out-of-pocket" expenses and insulating the personal assets for each of the owners. An LLC or LLP also avoids most of the "S" Corporation restrictions, and is far less costly to organize than a corporation. An LLC or LLP can be taxed as a sole-proprietorship, partnership, or a corporation depending on the needs of the owners and the boxes checked on the initial Department of Financial Institutions filing.

Resources

State of Wisconsin Department of Financial Institutions: Online application form to create a corporation or LLC.

Internal Revenue Service (IRS): Information on applicable tax liabilities and tax return forms based on business structure.

State Bar of Wisconsin

 

 

 

 

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