The Best Business Entity Type for Wisconsin Small Business?

The state of Wisconsin provides entrepreneurs with a wide breadth of business entities with which to organize their enterprises.  To answer the question which is the right one for you, you must understand what each has to offer, and also their unique drawbacks.  Certain types of entities are great for securing funding, while others provide attractive tax incentives, and some are simply chosen for their simplicity in functioning.  In this article our Wisconsin business attorneys will explore business entities in Wisconsin, looking into entity definitions, and provided you with a basis to start your search for the best business entity for you.  Specifically, we will answer the following questions:

• What business entities does Wisconsin offer?
• What are the tax implications of these different entities?
• What are the liability implications of these entities?

• What is the best business entity type for Wisconsin small business?
• What business entities does Wisconsin offer?

‍

What business entities does Wisconsin offer?

‍

Wisconsin offers a full range of different entities to suit your business needs, these include:

Sole Proprietorship

The most simple business entity in Wisconsin, an owner operator style setup where a businessperson and their business are not legally distinct.  By far the easiest and cheapest entity to setup, a sole proprietorship has no filing requirement with the state of Wisconsin.  However, if you would like to operate your sole proprietorship under a name separate from the owner’s legal name, that is to say employ a business handle, you can file a certification of trade name with the relevant County Register.  This step is purely optional though, and only for the owner’s benefit.

Partnership

Very similar to a sole proprietorship in Wisconsin, except instead of there being a single owner operator there are several, designated the “partners.”  Like the proprietor of a sole proprietorship, the partners are not legally distinct from their business.  If you would like to use a name other than that of the partners, you may file a certificate of trade name with the relevant County Registrar, but like sole proprietorship’s this step is optional, and only for the partner’s benefit.  While you do not have to file a partnership agreement, it can be advantageous to compile one regardless, documenting the rights and responsibilities of each party and how the partnership is to be governed.

Limited Liability Company (LLC)

You can think of LLC as a halfway point between sole proprietorship and a corporation.  This type of entity provides flexibility, allowing the members to elect how the LLC will be treated for tax purposes.  Like a corporation, LLCs are legally distinct from their members, but do not require the strict formalities that must be followed by a corporation, such as shareholder votes and mandatory board meetings.  

LLCs do need to have a registered agent available during business hour located in Wisconsin to receive service of process on behalf of the entity. To form an LLC in Wisconsin, the organizer founding the LLC must file articles of organization with the Department of Financial Institution.  The articles of organization define the entity’s name, legal structure, identify the registered agent, and generally delineate the firm’s management structure.  For more information about partnerships and LLCs in Wisconsin read our article, Wisconsin's New LLC and Partnership Laws.

‍

Corporation

You can think of sole proprietorships and corporations being opposite ends of the scale in terms of Wisconsin business entities. Whereas a sole proprietorship is a very simple organization with few formalities, a corporation is the exact opposite.  Corporations are legally distinct in terms of law, so the state of Wisconsin has a strong interest in making sure they are being incorporated and operated properly.  As such, Corporations must be filed with the Department of Financial Institutions. Like LLCs, Corporations follow a naming requirement, and must include reference to the fact the entity is enjoying corporate status in its title, generally ending in “Inc.”  Corporations must have an Article of Incorporation on file for public record in Wisconsin, and this document must include the names of the Directors of the company.  Corporations must also follow certain meeting and minute keeping requirements, making these records available to qualified shareholders.

In a corporation, the shareholders are the parties who own the equity of the firm, voting in elections to determine changes to bylaws and appoint corporate officers.  A big draw of the corporation model is the ability to issue stock, creating an efficient and attractive process for investors to put capital into the enterprise.  This can make raising capital much easier for corporations compared to other business entities.  Profit leaves the corporation in the form of dividends, cash disbursements to the stockholders either set by the corporations’ bylaws or voted on by shareholders. Wisconsin law requires corporations to have a legal Agent, a representative of the firm, be available in the state during normal business hours to receive service of process.  

What are the liability implications of these business entities in Wisconsin?

Sole Proprietorship

The most significant drawback to a sole proprietorship is lack of legal individuality.  As a sole proprietor is not legally distinct from their business entity, they are generally liable for every aspect of its operation.  Any legal liability incurred during a sole proprietorship’s course of business, for example a slip and fall at a family restaurant or damage incurred to a home during a renovation, would be answerable by the sole proprietor.  This is also the case for debts incurred on behalf of the business.  With the sole proprietor personally liable for their business, they are in the position of potentially losing more than they put into the business’ operation.  This liability can have the added negative effect of turning away risk averse potential investors.

Limited Liability Company

With an LLC, it is all in the name. Members and owners of an LLC in Wisconsin enjoy limited liability for the course of business.  Debts, obligations, and legal liabilities are all generally the responsibility of the LLC solely under Wisconsin statute. However, one should keep in mind the legal distinction of the LLC, as members tend to also be the parties operating the business.  Equipment purchased by the LLC is legally the property of the LLC, and as such can be reached by the entity’s liabilities.  

Corporation

Like an LLC, corporations are legally distinct from their shareholders under Wisconsin law.  This means that liabilities incurred by the corporation, be they legal or financial, are the sole responsibility of the entity, and do not flow to the shareholders. However, to take advantage of this desirable aspect of the corporate structure, the entity must be legally valid.  A failure on the part of the shareholders to abide by the formalities required by Wisconsin law, for example routine board meetings and minute keeping, could result in a court disregarding the liability protection a corporation would generally afford.  It is especially dangerous to abuse corporate funds, using corporate property for personal use, as this could end in a “piercing of the corporate veil,” with the shareholder in question being found personally liable.

What the tax implications of these business entities in Wisconsin?

Sole Proprietorship

The most significant benefit of a sole proprietorship is its treatment as a “pass-through” entity for the purposes of tax, both at the federal and at the state level in Wisconsin.  This means that the profit of the sole proprietorship is not taxed at its generation in the entity, and is passed through to the owner, being taxed solely as personal income. An added benefit of this model is that since the entity is not being taxed, it is not necessary to file a separate entity level tax document in Wisconsin.  

Limited Liability Company

With an LLC, the tax implications at the state level in Wisconsin are determined by the federal tax status of the entity.  Taking a lead from the Internal Revenue Service, single member LLCs, and LLCs that elect to be treated as partnerships, are treated as a “pass-though” entities, with profit being taxed as personal income.  However, there is a self-employed surtax that profit from an LLC will be subject to in Wisconsin.  If the LLC qualifies as a corporation at the federal level, it will be subject to Wisconsin corporate state tax, explained below.

Corporation

Like an LLC, a corporation is taxed individually.  This is a reflection of the fact the corporation is a legally distinct entity in Wisconsin law.  What this means for shareholder is that profit will be effectively taxed twice, once at the entity level and again as personal income when distributed to the shareholder in the form of a disbursement.  

What is the best business entity type for Wisconsin small business?

As with everything in law, the answer to what is the best business type available in the state Wisconsin for small business is; it depends.  A sole proprietorship or partnership are attractive due to their extreme simplicity, both in their formation and operation.  This can be very attractive for small business owners.  Keep in mind however this model comes with serious drawbacks, including direct liability for the business’ operations.  

A corporation faces the opposite problems, with strict filing and record keeping requirements, but complete legal separation between the business and the shareholders.  Corporations also have the added benefit of issuing stock, making capital formation a more straightforward process.  This benefit has to be weighed against double taxation however, and the same goes for LLCs.  The answer to which is best for you comes down to your business model.  More complicated businesses that engage in activities where there is potential for liability should consider an LLC, or if raising investor capital is a concern as well, a corporation.  For simpler businesses without significant risk of litigation, avoid the double taxation of the LLC and corporation by going with a sole proprietorship or partnership.

Request a consultation with a Wisconsin Business Lawyer.

There is a lot that goes into choosing a business entity. If you are looking to get started with your enterprise in the state of Wisconsin, take the step of informing yourself so you can get it right the first time. Call our office at (630) 324-6666 or schedule a consultation with one of our experienced business lawyers today. You can also fill out our confidential contact form and we will get back to you shortly.

‍