The following information should not be considered as a substitute for profession legal advice.

Your business can be structured into one of three legal forms – a sole proprietorship, a partnership, or a corporation. There are also variations on these three legal forms, such as the S-Corporation, and the limited partnership. The limited liability company (LLC) is a relatively new and popular form of business organization and has gained legal status in all states. When deciding your business' legal form, consider the  questions below and talk with a business attorney, business accountant and a business insuarance agent.  The information below is a brief overview of these options to help you to prepare for meeting with a professional.  In addition, the SBA provides a  "Choosing a Legal Structure" Wizard that runs through a series of questions to aid in determing what entity might best meet your needs.  Also click here for additonal useful information on this topic.

Will someone else share in ownership of the business? If so, it will not be a sole proprietorship. You must choose between a partnership, a corporation or possibly an LLC.

• How important is limiting personal liability for debts or legal claims against the business? If this is a major consideration, incorporating your business is generally the best means of limiting your liability. But, there are tradeoffs.  You should also consider the purchase of liability insurance.
• Which form of business organization will result in the least taxes? While there is no universal answer to this question, the rest of this section explains when it is and isn’t beneficial to incorporate. Beware of pursuing least taxes blindly. When you go to sell your business, especially if you are a sole proprietor, many times the only legal document that people trust is past income tax returns. If you were aggressively avoiding taxes it is likely that your tax returns don’t reflect a profitable business. This can negatively affect the value of your business.

            Advantages                                      Disadvantages
            Easy and economical to form            Unlimited personal liability
            Significant income tax deductions     Lack of continuity if owner is incapacitated
            Sole control over the business          Raising capital may be more difficult

Partnership
A partnership is a relationship, which exists between two or more persons carrying on a business in common with a view of profit.  As more than one person is involved, it is advisable to formulate a set of business rules, such as the following:  (1) dividing profit and loss;  (2) the amount of capital each partner must contribute to the business;  (3) partners salaries;  (4) preparation of annual accounts and audits;  (5) arrangements for withdrawing of the partners;  (6) arrangements for retirement or death of the partners;  (7) payment of interest on capital and loans and interest of these drawings;  (8) arbitration agreement if the partners fail to agree on a business clause.

            Advantages                                                      Disadvantages
            Ease of formation                                             Unlimited liability
            Low start-up costs                                           Lack of continuity
            Additional sources of business capital              Divided authority
            Broader management base                              Hard to find suitable partner
            Possible tax advantage    
            Limited outside regulation

C-Corporation
A c-corporation is the most formal and complex business structure, operating under state laws with a restricted charter.  Its owners are determined by the sale of shares of stock and ownership is restricted to those owning stock.  One or more adults can incorporate a business.  Stockholders need not be residents.  Their maximum liability is the unpaid balance of their subscription and full consideration for which shares were issued as well as unpaid employee wages.  The number of directors is fixed, and to change this number the charter of the corporation must be amended.  Directors do not need to be residents.

 The corporation name should include Corporation, Inc., or Ltd. in its name.  Names must be registered and cannot be the same as any other national or foreign company.  A corporation has no limit to its indebtedness and may be of perpetual duration.  There is no limit to the stock issues or to its class.  Stock must be purchased with money, labor, or property for its par value or set by the stockholders.  A central office must be registered within the state, and the office must have a registered agent.  A record of shareholders and their holdings and the business records must be left at this office.  The articles of incorporation must be filed with the secretary of state and the register of deeds in the county where the registered office is located.  Contact: Secretary of State, 10th floor, 30 West Miflin Street, Madison, WI 53702 or call (608) 266-8888. 

            Advantages                                               Disadvantages
            Limited liability                                          Closely regulated
            Specialized management                          Most expensive form to organize
            Ownership is transferable                         Extensive record keeping                      
            Possible tax advantages   
            Easier to raise capital

NOTE: It’s a good idea for a small business corporation to have liability insurance, otherwise the corporate veil could be pierced and the managers and corporate officers may be held personally liable for the activities of the corporation.

S-Corporation
For tax purposes, a corporation can elect “subchapter S” status.  In general, this means that while the business is legally a corporation and shares many of the characteristics of a corporation, it is taxed similarly to a partnership.

            Advantages                                                       Disadvantages
            Limited liability                                                   Restrictions on ownership
            Possible tax advantage                                     Limited number of owners
            Ownership interest, freely transferable             Deductibility of losses restricted

Limited Liability Company

As of January 1, 1994, Wisconsin allows the formation of limited liability companies. This type of business entity is organized and taxed as either a sole proprietor (one owner) or a partnership (more than one owner), but shields the owners from unlimited liability, as with the corporate form. The organizational documents must be written to comply with highly specific rules and regulations in order to achieve the benefits of partnership taxation and limited liability.

            Advantages                                      Disadvantages
            limited personal liability                    Lack of continuity if owner is incapacitated
            Easy to form                                     Raising capital may be more difficult
            Significant income tax deductions     May have difficulty getting credit    
            Sole control over the business          
           
Limited Liability Partnership
Wisconsin now allows a general partnership to simply file a one page registration statement with the Department of Financial Institution's office, pay a $100 filing fee, and obtain some liability protection. Specifically, an LLP provides “innocent” partners and their spouses liability protection from their partner’s negligence. Under an LLP, a partner is only responsible for torts attributable to that partner or a person acting under that partner’s direct supervision.

            Advantages                                                      Disadvantages
            Ease of formation                                             Hard to find suitable partner
            Limited liability                                                  Lack of continuity
            Additional sources of business capital              Divided authority
            Broader management base                              
            Possible tax advantage    
            Limited outside regulation

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