How to Choose a Business Structure for Your Startup
Starting a new business is exciting but can be a confusing process. There are numerous decisions to be made when planning to launch and one of the first is determining the legal structure.
Choosing the business type is important as it effects operations, taxes, the amount of paperwork to be filed, and how much personal liability is at stake.
Let’s take a brief look at the most common types of business structures.
Going It Alone: Sole Proprietorship
Sole Proprietorship is the most common type of business formation. Creating a sole proprietorship is easy and provides the owner complete control of the business. Filing taxes is also simple because the business is not taxed separately as the owner pays personal income tax on the profits earned. The tax rates are also the lowest of the business structures. On the other hand, the owner is personally liable for all debts and obligations of the business.
A Joint Venture: Partnership
A Partnership may be formed if two or more people go into business together. One advantage of this structure is that the partnership does not pay taxes on its income as the profit or loss is passed through to each of the individual partners. There are three types of partnerships: General Partnership, Limited Liability Partnership and Limited Partnership. In a General Partnership, all partners share the profits or losses and the legal liabilities equally. A Limited Liability Partnership protects the personal assets of the partners under the shield of the LLP while also protecting each partner in the group from the actions of other partners. Limited Partnerships are a hybrid of General and LLP, whereby the general partner in the partnership has unlimited liability for the debt while the limited partners bear less financial burden (and limited control over the company), based on their investments in the business.
More Protections: Limited Liability Company
Limited Liability Companies (or LLC’s) were formed to provide some liability protection for the business owners. Like partnerships, the business profits or losses are passed through to the owners. The primary difference is, LLCs offer liability protection of a corporation, meaning, the owners do not bear all the financial responsibilities of the business. An LLC is a more formal arrangement which requires Articles of Organization to be filed with the state. An LLC can elect to tax itself as a corporation, however, to do so requires tax and filing requirements of corporations.
A Separate Entity: Corporation
A corporation is a completely separate entity from its owners. A corporation enjoys the same rights as an individual as it can enter into contracts, hire employees, borrow money, own assets, and pay taxes. One important aspect of a corporation is the limited liability which means shareholders are not personally liable for the company’s debts but can take part in the profits through dividends and stock appreciation. Reporting obligations are more stringent as both LLCs and corporations must fulfill reporting requirements of the state. Corporations are also required to hold annual shareholder meetings and file annual reports since the board of directors must vote on any changes to the business.
When determining your business structure, take the time to evaluate the best balance of legal protections and ownership benefits.
If you’re looking to start a business, let us know. We’d be happy to help you set it up.