This article is meant as a brief outline of the most popular business structures available in Kentucky and some issues to consider when choosing a specific option. There are four main types of business structures available in Kentucky: Sole Proprietor, Partnership Limited Liability Company, and Corporation. There are also four main issues to consider when determining which structure is best for a particular business: liability protection, tax treatment, ability to raise capital, and the level of requirements and regulations to follow.
A Sole Proprietor is the simplest option. This business type usually involves one individual who owns and operates the business. A Sole Proprietor cannot share profits with anyone else, otherwise it is a Partnership. The main advantage to this option is that the owner simply reports his profit on his personal income tax return. The primary negative about a Sole Proprietorship is the lack of liability protection. If someone were to file suit related to the business’ activities, the owner’s personal possessions could be at risk. Raising money can also be difficult for Sole Proprietors.
A Partnership involves two or more individuals carrying out a joint operation in an attempt to make a profit. If you plan on having more than one person own and operate your business, then a Partnership may be the best option. General Partnerships and Limited Partnerships are available in Kentucky. The primary difference being that a Limited Partner is basically just an investor, with no control of the company but also with less liability exposure. Partnerships have the same primary advantages and disadvantages as a Sole Proprietor. The main advantage of the Partnership is that it is a “pass-through” tax entity, meaning that the company does not pay income tax, only the individual owners. Each Partner reports their gain or loss from the company on a Schedule K-9, and pays their share of tax individually. The problem is that the owners also have more liability exposure than other business structures.
Limited Liability Company
A Limited Liability Company can have a single owner or many. Just as it sounds, the Limited Liability Company’s primary advantage is that the owners generally are not personally liable for the debts and obligations of the company. The owners generally cannot lose more than the amount they invested, like owning a stock. Limited Liability Companies also have the advantage of having the option to be taxed like a pass-through Partnership or like a corporation. A Limited Liability Company offers many of the advantages of a corporation, yet without the burdensome requirements. It also offers the flexibility of a Partnership, but with added liability protection.
A Corporation is a separate legal entity from its owners and it’s the most complex structure to create and maintain. A Corporation can have one owner or many and there are a few variations within the Corporation umbrella. Corporations offer optimal liability protection and are the best option for raising investment capital. The main drawbacks of a Corporation are added regulations and corporate tax rules. The added regulations and formal requirements result in added time and expense. The problem with corporate taxation is that the company pays a tax on its income, and then owners must also pay tax on their income from the company. This is referred to as double taxation.