One of the most important decisions when starting a business is the type of legal structure you select for your company. This decision has a long-term impact not only on the taxes you owe, but it will also impact the amount of paperwork your business is required to do, the personal liability you face and your ability to raise money. The question is – what structure makes most sense?
It is important for business owners to seek expert advice from business professionals when looking at the pros and cons of business structure. The advice can come from a variety of sources, ranging from the no/low cost, such as the U.S. Small Business Administration (SBA) or the Service Corps of Retired Executives (SCORE). Other options which will most likely cost money include attorneys and accountants who are also valuable source of information.
Examining three primary factors of your company can help you decide the type of entity you want: liability, taxation and record-keeping. The following is a list of common forms of entities:
Sole Proprietorship: This is the easiest form of ownership and offers complete managerial control. However, the owner is personally liable for all financial obligations of the business.
Partnership: Involves two or more people, who agree to share the profits and losses of a business. The main advantage is that the partnership doesn’t bear the tax burden of profits or the benefit of losses-profits or losses are ‘passed through’ to partners to report on their individual income tax returns. The primary disadvantage is that each partner is personally liable for the financial obligations of the business.
Corporation: This is a form of business entity that is separate from those who founded it. It can be taxed and can be held legally liable for its actions. Corporations can also make a profit. The key benefit is avoidance of personal liability. The primary disadvantage is the cost to form a corporation and the extensive record keeping required. The double taxation, seen as a drawback of C-corporation is avoided by S-corporation (a popular variation of regular C-corporation) by allowing income or losses to be passed through on individual tax returns, similar to partnership. The only limitation of S-Corp is that the stocks must be held by US Citizens or permanent residents.
Limited Liability Company (LLC): This type of business entity is a hybrid form of partnership that allows owners to take advantage of the benefits of both corporate and partnership forms of businesses. Profits and losses can be passed through to owners without taxation of the business itself while owners are shielded from personal liability.
There are several criteria you need to evaluate when forming a business entity including, but not limited to: legal liability, tax implications, cost of formation and ongoing administration, flexibility and future needs. The business structure you start out with might not meet your needs in years to come. This is not a decision to take lightly or based on a decision made by an outside individual. Consider the unique needs of your business and seek expert advice before setting up your business format.
For more information and details about types of entities, visit: http://www.entrepreneur.com/article/38822
Thanks for reading, and until next time… stay WISE!