How should I set up my business?

UPDATED: Sep 30, 2022

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How should I set up my business?

My brother and I are starting an online sales business. He lives in another state. We are wondering what would be the best legal/tax structure to set up as – an LLC, partnership, an S-Corp, etc. and why. We also would like to know if there would be any tax issues since we both live in different states.

Asked on October 8, 2016 under Business Law, Colorado


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 6 years ago | Contributor

An LLC or S-corp. are both better than a partnership, because a partnership does not limit your liability: i.e. if your business is a partnership and incurs a debt, violates a contract, is sued, etc., you and your brother would be personally liable. An LLC or a S-corp. both provide substantial (but not absolute; there are exceptions) protection from most business debts or liabilities which you do not personally guaranty, making this a much safer way to conduct business.
Both S-corp.'s and LLCs which elect "partnership" tax treatment are "pass through" entitites that drop their profits or losses directly to your personal tax returns and avoid corporate double taxation, so there is nothing to select between them in that regard.
Generally, for a small business, an LLC is a slightly better choice: there are less formalities and paperwork involved, and it gives you more flexibility in how you apportion responsibility and economic participartion: e.g. if one of you will invest less money but do as much or more work, you can have both of you be equal, whereas in a s-corp., whomever invests more is in control.
As to tax implications: a very complex question, depending on the taxes of both your states, where the work is done, where sales are made, etc. You are advised to consult with a CPA or other tax professional in depth specifically about this issue. There is no general or generic answer we can provide.

IMPORTANT NOTICE: The Answer(s) provided above are for general information only. The attorney providing the answer was not serving as the attorney for the person submitting the question or in any attorney-client relationship with such person. Laws may vary from state to state, and sometimes change. Tiny variations in the facts, or a fact not set forth in a question, often can change a legal outcome or an attorney's conclusion. Although has verified the attorney was admitted to practice law in at least one jurisdiction, he or she may not be authorized to practice law in the jurisdiction referred to in the question, nor is he or she necessarily experienced in the area of the law involved. Unlike the information in the Answer(s) above, upon which you should NOT rely, for personal advice you can rely upon we suggest you retain an attorney to represent you.

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