One of the most important choices you need to make when launching a business is the type of legal structure you choose for your company. The decision you make on your business structure can have a great impact on your tax liability, the amount of paperwork you are required to keep, your ability to obtain funding and the personal liability you face.
This article provides a quick look at the most common business structures and the differences between them. The most common business structures are:
The Sole Proprietorship is the simplest structure, and it usually involves only one individual who owns and runs the business. If you want to work alone, this business structure may be the right option for you.
As a sole proprietor, you have the right to run the business any way you see fit, as there are no partners or shareholders to consult. And a sole proprietorship is inexpensive to start.
A partnership is owned by two or more individuals, who agree to share in its profits. Like the sole proprietorship, a partnership is easy to set up and the task involved is usually minimal.
Having partners offers benefits that sole proprietorship cannot. In some cases, having a partner to help with finances and share the workload might be necessary to get the business off the ground.
The tax structure of a partnership is the same as sole proprietorship except they share the profits and liabilities of the business venture. It is important that all the parties involved in a partnership understand their rights, duties, and obligations.
Partnerships can be limited or general. Limited partners have limited personal liability, which is the amount they invested or contributed to the company. The general partner’s personal liability is potentially unlimited. Limited partners cannot participate in the day-to-day operations or management of the company
A corporation is an organization controlled by a group of individuals and is much more complex than the partnership or sole proprietorship. The shareholders dictate who runs the organization or company and how business is conducted. Each member of a corporation receives profits based on the shares of stock that they own.
A corporation can raise funds more easily than a sole proprietorship or partnership. A corporation is considered a separate entity from the owners, which means that owners of a corporation will not have personal liability.
Corporations tend to pay more taxes and similar fees, but it provides the most protection for the owner(s). In the event of business failure, any personal property cannot be attached or lost.
Limited Liability Companies
This form of business structure is a cross between a partnership and a corporation. Limited Liability Companies do not have any legal status under federal law, but under state law they are allowed to provide their owners or members with substantial limited liability. In Limited Liability Companies owners can also decide how to be treated when it comes to filing income tax returns.
You can switch business structures, but it’s advisable to decide early on which structure is suitable for your needs. It can get complicated, and pricey, to switch structures, and the process or effort could distract from conducting your business.
Before deciding which business structure to select, it’s important to consult a legal adviser or an accountant.
If you’re planning to start a new business, it is advisable to examine all the advantages and disadvantages of each business structure prior to deciding which one to choose.