How to Settle on a Business Structure
Choosing the right structure for your business is one of your most important decisions, and it will have lasting implications for your company. When considering which type of structure will best suit your business, you should take into consideration your business dealings, and the growth you expect in the future. Choosing a particular structure will influence the level of control you have in the company, its size and nature, and its tax implications. This article will teach you about the different business structures and how each can affect your business.
*Partnership. This is a relationship between two or more people who own a business; each partner contributes something such as labor, property, skill or money, and gets a share of the profits and losses incurred by the business. Instead of paying income tax, profits and losses are passed on to the partners who in turn report them on individual returns. With a partnership, profits are more easily reported and employees are more easily attracted. However, one partner can be held legally liable for the actions of another, and one partner's change of mind or early departure can mean the end of the business.
*The LLC, or limited liability company, provides the liability features of a corporation and the tax simplicity of a partnership. However, forming an LLC is more complex than forming a partnership. Partnerships and LLCs are taxed in the same way, but if the LLC has two or more of the following characteristics, they must file corporate forms.
*Liability is limited to the amount of assets
*Life continuity
*Centralization of management
*Free transfer of ownership
*Corporation. When forming one, shareholders exchange money and/or property for stock in the company. Corporations take the same tax deductions as sole proprietorships, and they can also take some other deductions. They conduct business, see income and loss, pay taxes and also disburse dividends to shareholders. Corporate profits are taxed as they are earned, and then taxed again when the shareholders collect dividends. Shareholders have very limited liability for debts or judgments, and they are usually only held liable for the stock they own. Incorporation requires a larger investment of time and money than other company structures, and they are closely monitored by local, state and federal agencies.
*S corporations are just a tax election for a corporation that allows it to avoid double taxation (as mentioned above). In most cases, S corporations are exempt from income tax other than that on passive income and capital gains. On tax returns, S corporation shareholders include their shares of the corporation's income, deduction, credit and loss.
*Sole proprietorships own an unincorporated business on their own. These are the least expensive and least complex form of company, and the proprietor has full control of all decision making. They get to keep all their income with the exception of what is taken in taxes, and a personal tax return is typically sufficient. They also have more liability and are legally responsible for all debts. With a sole proprietorship, it can be hard to make the distinction between business and personal assets.