How should I organize my business? How is it formed, operated, and taxed?
Choosing the form of legal organization for your business is similar to buying a new car. You have to know what models are available and which features and options you desire. There are four basic "models" or types of business organizations: sole proprietorships, partnerships, limited liability companies, and corporations. The key features a business owner should consider are liability protection and desired tax treatment. Some business organizations offer liability protection for the owners. Others do not. Some business organizations are taxed as a separate entity. Others are merely conduits and all of the income and expenses flow through to the owners.
A lawyer can help you determine which type of business organization is best for your business, and can help draft important agreements – such as shareholder, partnership, and operating agreements – that will help you manage your business.
Limited Liability Companies
A limited liability company (LLC), like a corporation, is a distinct legal entity.
Although it is not a corporation, an LLC provides its owners with the same liability protection of a corporation. An LLC receives its existence by filing Articles of Organization with the DFI. The owners, called members, receive "interests" or "units" in the LLC in exchange for property, money, or services. Members usually enter into an Operating Agreement that defines the obligations and duties of the members and managers. The LLC's business may be run by "managers," who may or may not be members. If an LLC is managed by all of its members, the members have the same broad authority as a general partner in a general partnership. If the LLC is managed by one or more managers, their authority resembles that of a general partner of a limited partnership. The other LLC members are more akin to investors in the company.
An LLC can elect to be taxed as a C corporation or S corporation, but most LLCs do not make that election. Normally, an LLC is treated for tax purposes either as a sole proprietorship (if only one owner) or as a partnership (if two or more owners). If it is taxed as a sole proprietorship or partnership,the income and losses flow through to the LLC members. If it is taxed as a corporation, the entity itself pays the tax. If the LLC has more than one member it must apply for an EIN, and distributions to its members may be partnership distributions and not subject to employment taxes. The LLC may, but is not required, to have employees. If it has employees, it is subject to the withholding rules discussed above. If the LLC is taxed as a partnership, it files Form 1065 with the federal government and Form 3 with the state. If it is to be taxed as a corporation, it files Form 1120 or 1120S with the federal government and Form 5 or 5S (where the entire business income is attributable to Wisconsin) with the state.
LLC members and managers enjoy limited liability. They are not liable for the debts and obligations of the business, unless they guarantee the obligations or fail to pay withholding taxes as discussed above. If an LLC violates environmental laws, the individual owners may have personal liability for the violation.
There are a variety of state and federal agencies that can help you over the hurdles of starting a new business.
The Wisconsin Economic Development Corporation maintains information and offers free consulting services. Write to: 201 W. Washington Ave., P.O. Box 887, Madison, WI 53701; or call (855) 469-4249. www.InWisconsin.com
The Job Center of Wisconsin provides a variety of free services to employers. Call (888) 258-9966 or visit www.jobcenterofwisconsin.com.
The federal Small Business Administration can provide financial and other assistance. Contact the SBA at: 740 Regent St., Suite 100, Madison, WI 53715, (608) 441-5261; or 310 W. Wisconsin Ave., Suite 580W, Milwaukee, WI 53203, (414) 297-3941. www.sba.gov. The Milwaukee SBA also sponsors the Service Corps of Retired Executives (SCORE), (414) 297-3942.
The Wisconsin Small Business Development Center provides noncredit management courses for small business owners, managers, and entrepreneurs. SBDC counselors offer free one-on-one advice for those businesses in need of specific management assistance. The center also conducts research, distributes information, and works with other state agencies offering specialized assistance. The SBDC state office is at 432 N. Lake St., Madison, WI 53706-1498. Call (608) 263-7794 to find the SBDC office in your area.
If you plan to incorporate your business and need information about Wisconsin laws, contact the Wisconsin Department of Financial Institutions, Division of Corporate and Consumer Services (CCS), P.O. Box 7846, Madison, WI 53707, or call (608) 261-7577.
The Internal Revenue Service can provide several useful, free publications to help you comply with federal tax laws and acquire a federal employer ID number. Call (800) 829-1040 (individuals) or (800) 829-4933 (businesses). The Wisconsin Department of Revenue also can provide free publications and help you comply with state tax laws and acquire any necessary tax permits and identification numbers. Contact the DOR at 2135 Rimrock Rd., Madison, WI 53713., P.O. Box 8901, Madison, WI 53708, or call (608) 266-2772. www.revenue.wi.gov
Last revised: 9/2016
This is one in a series of consumer information pamphlets sponsored by the State Bar of Wisconsin. This pamphlet, which is based on Wisconsin law, is intended to inform and not to advise. No person should ever apply or interpret any law without the aid of a trained expert who knows the facts, because the facts may change the application of the law.
The State Bar publishes a series of online consumer pamphlets addressing common legal issues that many people face sooner or later in their lives, such as buying a home, going through a divorce or small claims action, and preparing a will or estate plan. Each pamphlet conveys basic legal information and answers frequently asked questions in easy-to-understand language.
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