 | Chris Mitchell is an attorney with Fleeson, Gooing, Coulson & Kitch, L.L.C. Chris received his bachelor of science degree from Bethel College in 1995, and his juris doctor from Washburn University in 1999. Chris joined Fleeson, Gooing, Coulson & Kitch, L.L.C., in 2004 and practices primarily in the business area. |
Legal
2005-03-01 10:05:00
Which Kansas business structure is best for me?
ANSWER: You must first have a general understanding of the options which are available to you. The following is a general description of those options. There are four general types of business structures in Kansas: sole proprietorships, partnerships, limited liability companies, and corporations. Partnerships require two or more partners, therefore, since you will be the only owner, a partnership is not an option for you at this time. The sole proprietorship structure is the most simple and likely the most prevalent structure used among businesses with one owner. Kansas does not require an individual to make any filings with the Secretary of State to create a sole proprietorship. A sole proprietorship must be owned by an individual and that individual can be the only owner. Income from a sole proprietorship is reported on the individual's personal income tax return and the income is subject to self-employment tax. One significant factor to consider with a sole proprietorship is that personal assets of the individual are subject to the claims of creditors of the business, regardless of whether such personal assets are used in the business. Another option for you to consider would be to form a corporation. A corporation is formed when the incorporator files the appropriate documents with the Kansas Secretary of State. Generally, a corporation may be owned by any individual, trust, estate or legal entity. The stockholders of a corporation elect directors, who then appoint and supervise officers to manage the day to day affairs of the corporation. In contrast to a sole proprietorship, a stockholder's liability for the claims of any creditors of the business is in most cases limited to the stockholder's interest in the corporation, meaning that the stockholder's other personal assets are not subject to the claims of such creditors. There are exceptions to this liability protection. Any wages paid by the corporation to you would be subject to employment taxes. However, dividends you receive are not. For income tax purposes, a corporation may either be an S corporation or a C corporation. An S corporation files an informational return reflecting the income or loss for the corporation, and in turn, the stockholder of that corporation includes his or her share of the income or loss on such stockholder's individual income tax return. Thus, the S corporation does not pay corporate income tax. In contrast, a C corporation is required to report and pay corporate income tax. Thus, a C corporation is subject to a two tiered tax structure. In order for a corporation to be treated as an S corporation an election needs to be filed with the IRS and certain qualifications need to be met. In addition, any dividends paid to a stockholder of a C corporation are taxable to such stockholder. You may also choose a limited liability company as the entity for your new business. Similar to a corporation, a limited liability company is formed when the organizer files the appropriate documents with the Kansas Secretary of State and may be owned by any individual, trust, estate or legal entity. Since you would be the sole member of the limited liability company, the limited liability company would be treated the same as a sole proprietorship for income tax purposes and you would not be required to file a separate income tax return for the limited liability company; instead, you would report the income on your personal tax return. As a single member limited liability company, such income is subject to self-employment tax. As the single member you may manage the business yourself or you may choose to appoint one or more managers to manage the business for you. Similar to a stockholder in a corporation, the personal assets of a member of a limited liability company are not generally subject to the claims of business creditors beyond what such member has invested in the limited liability company.There are other issues to consider when deciding upon the choice of business structure for your new business. You must consider the nature of the business. What types of assets will be used and owned in the business? Are you considering bringing in partners or investors into the business in the future? If so, do you want those partners/investors to have a say in the management of the business? As you can see, there are many areas to consider in deciding upon the right business structure for your business, and I recommend that you visit with an attorney before making this decision.
