So youve finally decided to open you own business but you cant determine the proper structure to fit your needs. With each structure providing several benefits based on the type of ownership and industry the task could be daunting. Understanding the proper business structure is an essential element of your new business foundation, and the Tax Guru is here to save the day.
There are four main forms of business; sole proprietorship, partnership, Limited Liability Corporation, and Corporations.
Sole Proprietorship
The easiest and most cost effective form of business, sole props are the structure of chose for most first time business orders. Its a one-person business that is not registered with the state like a limited liability company (LLC) or corporation. You can operate using your social security number or a tax ID, but you don’t have to file any papers to set up a sole proprietorship; just start working. The lackadaisical approach of this structure also makes it very dangerous. Legally you and the business are one in the same. So this makes you personally liable for any business-related obligations, such as debts or court judgments.
Partnership
A partnership is similar to a sole prop. Its simply a business owned by two or more people that hasn’t filed papers to become a corporation or a limited liability company (LLC). And like a sole proprietorship, each owner pays taxes on their own shares of the business and they are each personally liable for the entire amount of any business debts and claims. These structures make sense for businesses that have the least likelihood of being sued or dont need much money to start-up or buy inventory.
Limited Liability Partnerships (LLC)
Opening an LLC is not recommended for small businesses because they are costly and complicated to set up and run. Limited partnerships are usually created by one person or company (the “general partner”), who will solicit investments from others (the “limited partners”). According to the legal advisory website nolo.com, the general partner controls the limited partnership’s day-to-day operations and is personally liable for business debts. Limited partners have minimal control over daily business decisions or operations and, in return, they are not personally liable for business debts or claims.
Corporations
If your trade is highly litigated forms of business, a corporation is probably your best bet. Corporations exist as “pretend” persons, granting a limited protection to the actual owners of the corporation. This limitation of liability is one of the many advantages to incorporation, and is a major draw for smaller businesses to incorporate. You will be incorporated to the state you registered the business and governed by the laws of incorporation in that state. Things could get a little hanky if choose to issue stock, either private or public, and the corporation will then usually be governed by its shareholders. Its strongly recommended you consult counsel when forming a corporation to help protect future investments and the others of the company.
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