Are you considering starting a business but are not sure which business structure to choose? Before choosing a business structure you should consider several aspects like personal liability and taxes. Changing your business structure in the future can be costly and hectic. We will address some common types of business structures below to aid in your decision-making.
Popular types of legal business structures
Here are some popular types of business structures that you can consider.
Sole proprietorship
A sole proprietorship involves an individual business owner controlling all business operations. In this type of business structure, the owner is liable for all financial obligations and debts. As a sole proprietor, you are not required to present your business as a separate entity. Instead, your business taxes are included in your income tax and you are solely responsible for all business operations. You can opt for a sole proprietorship business structure if you wish to have total control over your business. In a sole proprietorship structure, you are responsible for all liabilities and your personal assets could be at risk. However, you can always mitigate risks using legal insurance coverage. Starting a sole proprietorship business is relatively easy and does not involve complicated processes. You will also incur low costs compared to other types of business structures.
Partnership
A partnership business structure involves two or more parties joining to start a business. While partnerships can be informal, a written agreement between the parties would be more suitable in case of any disputes. In this type of business setting, the partners are liable for all financial obligations of the business and the actions of other partners. Like a sole proprietorship, a partnership business does not present as a separate entity from its owners. Partners are required to file business taxes through their personal income taxes. A partnership business structure would be suitable if you are part of a group that wants to test a business idea. Starting a partnership is also easy and does not involve too much paperwork. However, you should be careful since you will be personally liable if the business incurs losses or accumulates debts.
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Limited liability company
A Limited liability company (LLC) is a business structure that combines the characteristics of both partnership and corporation business structures. This type of business structure provides members with personal liability protection. This means that in the event your business becomes bankrupt or faces legal action, your personal assets will not be at risk. You can also enjoy the low tax benefits of a corporation business structure where the profits and losses pass to your personal income. As a member of a limited liability company, you are required to include your profit and loss share in your personal tax returns. A limited liability company would be an ideal choice if you don’t want to risk your assets.
Corporation
A corporation is a form of business structure that is separate from its owners or shareholders. This means that the members are not liable for the actions of the corporation. There are two types of corporations; S-Corps and C-Corps. Establishing a corporation can be a complicated process that involves a lot of paperwork. Seeking professional legal counsel would be suitable when starting a corporation. As a member of a corporation, you are protected from personal liability and your personal assets remain safe. Sometimes corporations pay taxes twice. The corporation’s profit is taxed and shareholders also file personal income taxes on their dividends. A corporation structure would be ideal for large businesses that want to generate quick capital and maximize efficiency.
Takeaway
Choosing a business structure requires careful consideration. Once you choose a structure, it can be very difficult to make changes. The best business structures for start-ups and medium-sized businesses are sole proprietorships and partnerships. Large entities can benefit from a corporation or limited liability company business structures. For more assistance, feel free to contact a law firm that can help.