When you begin a business, you must choose the business structure for your company. Your business structure affects how the business and the owners are legally and financially liable for company debts and obligations. Therefore, it is crucial for every business owner to work with a South Carolina business attorney to be aware that the decisions they make regarding the business structure affect potential personal liability.
Overview of Business Structures and Their Liability Aspects
The level of personal liability for business owners differs depending on the business structure they choose for their company. The most common types of business structures in South Carolina include:
Sole Proprietorship
A sole proprietorship is the most straightforward business structure to form. Because it is not a legal entity, the owner is personally responsible for all business debts and liabilities. If someone sues the business, they are suing the owner. A sole proprietor pays personal income taxes on the business income on their personal tax return.
Partnership
There are two types of partnerships – a general partnership and a limited partnership.
A general partnership is a business entity of two or more individuals who agree to operate a business. The partners are personally liable for all business debts and obligations. Unless the partnership agreement states otherwise, all partners can make decisions for the business that are binding on all partners.
A limited partnership has at least one general partner and one or more limited partners. Limited partners do not participate in the management of the company. Therefore, a limited partner’s personal liability is restricted to the amount they invested in the company.
Partnerships are pass-through entities for tax purposes. The partnership does not pay taxes on income. The partners pay personal taxes on the income they receive from the partnership.
Corporation
Corporations are legal entities. Individuals own shares of the corporation. They are not responsible for the debts and liabilities of the corporation. Corporations provide the highest level of protection from personal liability.
A C-Corporation files tax returns and pays taxes on the income the company earns. Shareholders pay personal income taxes on the amount they receive in dividends. However, if the shareholders elect to be classed as an S-Corporation, income passes through the company like a partnership and is taxed on the shareholder’s personal income tax return.
Limited Liability Company (LLC)
An LLC is a legal entity created under state law. It offers members (i.e., the owners) limited liability from personal responsibility for company debts and obligations. It does not provide the same level of protection from personal liability as a corporation.
Unless the LLC elects to be taxed as a corporation, income passes through the company to the owners. The owners report the income on their personal tax returns.
Consult With a South Carolina Business Lawyer About the Elements to Consider When Choosing a Business Structure
Personal liability and tax liability are two critical elements to consider when choosing a business structure for your company. However, understanding all of the legal and financial implications of each business structure is also essential.
Before setting up your business, it is wise to meet with an experienced South Carolina business lawyer. A business attorney will review the various business structures, explain the implications for personal liability, and discuss how the business structure impacts the company’s operations. Call Willcox, Buyck & Williams, P.A. to schedule a consultation to explore business structures with an attorney.