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You will make a lot of important decisions when starting a business, but one of the most important is the type of legal structure you select. This choice will have an impact on the amount you pay in taxes, personal liability, record-keeping, and more. Here is a rundown of the types of business entities and a short description of each.

 

Sole Proprietorship

A sole proprietorship is one of the least expensive and easiest types of business to operate in North Carolina. Simply put, it is a business that is owned and operated by an individual. This business structure allows the owner to be entitled to all profits, loses, debts, and liabilities. The State of North Carolina does not impose paperwork requirements to establish a sole proprietorship. However, you do have to report business income and any loses by filling out the Standard IRS Form 1040.
It is important to register your business with the Pitt County Register of Deeds. Specifically for operating a sole proprietorship, you must complete a Certificate for Assumed Name and file it at the Register of Deeds.

Advantages of a Sole Proprietorship

  • A sole proprietor has complete control and decision-making power over the business
  • Sale or transfer can take place at the discretion of the sole proprietor
  • No corporate tax payments
  • Minimal legal costs to forming a sole proprietorship

Disadvantages of a Sole Proprietorship

  • The sole proprietor of the business can be held personally liable for the debts and obligations of the business. Additionally, the risk extends to any liabilities incurred as a result of acts committed by employees of the company.
  • All responsibilities and business decisions fall on the shoulders of the sole proprietor.
  • Investors usually will not invest in sole proprietorships

 

Limited Liability Corporation (LLC)

A limited liability corporation (LLC) has rapidly become one of the most popular business structures for small business because it is considered simpler and more flexible than a corporation. An LLC has a combination of a general partnership and S corporation characteristics. It has the corporate characteristic of limited liability and the tax advantages and flexibility of general partnerships.

To form an LLC, you can complete the forms on your own by going through the North Carolina Secretary of State’s Office. If you need further help establishing an LLC, you can always retain the services of a local attorney, or use an on-line source like Legal Zoom.

Advantages of an LLC

  • LLC is considered a separate legal entity
  • Unlimited number of shareholders unlike the S-corporation limit of 100
  • Tax benefits of a partnership (e.g., members are taxed for profits at individual tax rates)
  • Members have management control of business without risking liability
  • Members can be individuals, partnerships, trusts, corporations, or other LLCs
  • Membership can be transferred (this is regulated by the Articles of Organization)
  • Various capital-raising options
  • Free of regulations imposed on S corporations

Disadvantages of an LLC

  • Yearly filing costs
  • Requires time to file appropriate paperwork
  • Legal and accounting assistance recommended

 

General Partnership

A partnership is a business with multiple owners who each have invested in the business and share in the profits, losses and management decisions. There are two types of partnerships: general and limited.

A general partnership is held personally liable for all debs, taxes and other claims against the partnership

A limited partnership has both general partners and limited partners. This partnership restricts the amount of personal liability to a limited partners. It allows investors to contribute but will only expose them to a limited amount of liability and management control. The limited partner is only liable up to the amount of investment made.

To form a general partnership, you can complete the forms on your own by going through the North Carolina Secretary of State’s Office. If you need further help establishing a general partnership, you can always retain the services of a local attorney, or use an on-line source like Legal Zoom.

Advantages of partnerships

  • Simplest form of business for two or more owners
  • Business can be established with minimal formal documentation (However, it is recommended that partnerships have a formal written agreement with provisions for death, disability, liability, compensation, benefits, and dissolution)
  • Profits and losses belong to the partners
  • Partners have freedom to operate the business on behalf of the partnership (i.e., they can hire/fire employees, borrow money, or enter into contracts)
  • No income tax on partnership entity (it’s passed on to individual partners)
  • Buy/sell agreements
  • Availability of resources/skills from all partners
  • Limited liability partners enjoy lower risks

Disadvantages of Partnerships

  • General partners liable for all debts and actions of the partnership (joint and several liability)
  • Limitations apply to raising investor capital (e.g., all investors would be partners)
  • Responsibilities and actions of partners, if not specifically written out, can overlap or contradict one another
  • Partnership income added to other sources of income and taxed at owner’s personal tax rate
  • Complications with taxes arise if fiscal year varies from calendar year
  • Partnership entity lacks perpetual existence in the event of death, disability, or withdrawal of a partner (provisions must be made in advance)

 

C-Corporation

A corporation, sometimes called a C-Corp, is a legal entity that's separate from its owners. Corporations can make a profit, be taxed, and can be held legally liable. A C-Corp offers the strongest protection to its owners from personal liability, but the cost to form a corporation is higher than other structures. C-Corp’s also require more extensive record-keeping, operational processes, and reporting.

Unlike sole proprietors, partnerships, and LLCs, C-Corp’s pay income tax on their profits. In some cases, corporate profits are taxed twice — first, when the company makes a profit, and again when dividends are paid to shareholders on their personal tax returns. C-Corp’s have a completely independent life separate from its shareholders. If a shareholder leaves the company or sells his or her shares, the C-corp can continue doing business relatively undisturbed.

C-Corp’s have an advantage when it comes to raising capital because they can raise funds through the sale of stock, which can also be a benefit in attracting employees. They also can be a good choice for medium- or higher-risk businesses, businesses that need to raise money, and businesses that plan to "go public" or eventually be sold.

To form a C-Corp, you can complete the forms on your own by going through the North Carolina Secretary of State’s Office. If you need further help establishing a C-Corp, you can always retain the services of a local attorney, or use an on-line source like Legal Zoom.

 

S-Corporation

An S-Corporation, sometimes called an S-Corp, is a special type of corporation that's designed to avoid the double taxation drawback of regular C-Corps. S-Corps allow profits, and some losses, to be passed through directly to owners' personal income without ever being subject to corporate tax rates.

Not all states tax S-Corps equally, but most recognize them the same way the federal government does and taxes the shareholders accordingly. Some states tax S corps on profits above a specified limit and other states don't recognize the S-Corp election at all, simply treating the business as a C corp.

There are special limits on S-Corps. S-Corps can't have more than 100 shareholders, and all shareholders must be U.S. citizens. You'll still have to follow strict filing and operational processes of a C-Corp.

S-Corps also have an independent life, just like C-Corps. If a shareholder leaves the company or sells his or her shares, the S-Corp can continue doing business relatively undisturbed.

To form an S-Corp, you need to complete and file IRS Form 2553. If you need further help establishing a S-Corp, you can always retain the services of a local attorney, or use an on-line source like Legal Zoom.

 

Non-Profit

Nonprofits support various efforts throughout communities in ways government and the business community cannot. They take on specific issues or causes that typically do not have a traditional funding source. If you are passionate about something, you should go for it! Click HERE to learn more about the steps you will need to take to start a non-profit business.