How to Choose the Right Structure for Your Arkansas Business

Deciding to start a business in Arkansas can be an exciting and rewarding venture. You will have to make many decisions throughout the process, but one of the most important is selecting the proper business structure.

Arkansas business owners have several options for structuring their entity, each with pros and cons. Here’s what you need to know about basic business structures and what to consider when picking yours.

What Structure Is Best for Your Business?

Understanding your options for choosing a business structure is important for long-term success and compliance with state regulations. Here are some of the most common types of entities for small business owners in Arkansas:

Corporation

Choosing a corporation as your business structure has a key benefit for its owners: limited liability. This means the corporation, itself, is a separate legal entity from its owners, the shareholders. A corporation can own property, enter contracts, borrow money, and more.

If operating properly, the separation of the corporation and shareholders can offer special protection. If the corporation is sued or incurs debt, shareholders’ personal assets (like homes or savings) may be protected.

C-Corps vs. S-Corps in Arkansas

There are two types of corporations in Arkansas:

• C-Corp: This traditional model operates as a separate tax entity.* C-Corps are double taxed, both on its profits and on any dividends it pays out to shareholders.
• S-Corp: This structure can offer a tax advantage comparable to an LLC.* S-corps may avoid double taxation because the corporation’s profits and losses “pass through” to the shareholders’ who file profits and losses on their personal tax returns. Not every corporation, however, qualifies for S-Corp status. For example, an organization must meet requirements like limiting the number of shareholders and meeting specific ownership types.

Limited Liability Company (LLC)

One of the most popular types of business structures, an LLC provides owners with limited liability protection like that of a corporation. The owners of an LLC, known as members, are not generally personally liable for the debts and legal liabilities of the business, unless they are not following the proper corporate formalities.

Unlike C-corporations, which face double taxation, LLCs allow for more informal management and can offer more tax flexibility.* This means that profits and losses “pass through” the business to individual members who report them on their personal tax returns.

Partnership

A partnership involves two or more individuals owning and operating a business. Partnerships are characterized by shared decision-making, responsibilities, and liabilities among the partners.

There are two main types of partnerships:

• General Partnership: Partners share equally in profits and losses, as well as management responsibilities. Partners are also fully and equally liable for the business’s debts and obligations. This means if the business gets sued or goes into debt, partners’ personal assets are at risk.
• Limited Partnership: This type of partnership allows for two categories of partners – general partners who manage the business and are fully liable, and limited partners who contribute financially but have limited involvement and liability. This arrangement is a good option for attracting investors who want to earn passive income without giving them full control.

Sole Proprietorship

A sole proprietorship is the simplest form of business structure in Arkansas; sole proprietorships are owned and operated by a single individual. In this arrangement, there is no legal distinction between the business and its owner, meaning the owner assumes all responsibility, liability, and debt associated with the business. Sole proprietors have full control over their business and keep all the profits generated by it.

Sole proprietorships are easy to set up and require minimal formalities, which make them an attractive option if you’re looking to start a one-owner business quickly with little paperwork. The biggest drawback for sole proprietors is being personally liable for all debts and claims against the business. This puts the proprietor at greater risk if the business is sued or a debt is owed.

How Do You Choose the Appropriate Entity?

Ultimately, the structure you choose should be based on your business goals and unique needs. What does your tax professional recommend? How much personal risk are you willing to take on? While you keep all the profits in a sole proprietorship, your assets are on the line if something goes wrong. Perhaps the flexibility of a corporation would be more appropriate if you envision long-term growth potential and want protection from liability.

Consulting a qualified business attorney who understands Arkansas law and can provide personalized advice based on what you want out of your business should be one of your first decisions.

Questions about Business Entities? Call TLGNWA Today

If you’re thinking about starting a business and have questions about which structure to choose, call The Law Group of Northwest Arkansas PLLC today. Our attorneys can explain your options, help you mitigate risk, and poise your new business for success by helping you get started with the appropriate business structure.

Call 479-316-3760 today or reach us through the contact form on our website to see how we can help you make the right choice for your new business.

* The Law Group of Northwest Arkansas PLLC cannot not offer tax advice, but will work with your tax professional to follow their guidance on the best tax election for your business.