Choosing a Business Organization
Of all the choices you make when starting a business, one of the most important is the type of legal structure you select for your company. Not only will this decision have an impact on how much you pay in taxes, it will affect the amount of paperwork your business is required to do, the personal liability you face and your ability to raise money. Selecting a business organization (ie. corporation, LLC, or partnership) can seem like an incredibly daunting task. So, here are some brief descriptions of your options to help you make the right selection.
A sole proprietorship is the most common form of business organization. It’s easy to form and offers complete managerial control to the owner. However, the owner is also personally liable for all financial obligations of the business.
A partnership involves two or more people who agree to share in the profits or losses of a business. A primary advantage is that the partnership does not 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. This can also be a disadvantage, nevertheless, as liability also passes through in a similar manner.
A corporation is a legal entity that is created to conduct business. The corporation becomes an entity-separate from those who founded it. Like a person, the corporation can be taxed and can be held legally liable for its actions. The corporation can also make a profit. The key benefit of corporate status is the avoidance of personal liability. The primary disadvantage is the cost to form a corporation and the extensive record-keeping that’s required. While double taxation is sometimes mentioned as a drawback to incorporation, the S corporation avoids this situation by allowing income or losses to be passed through on individual tax returns, similar to a partnership.
A hybrid form of partnership, the limited liability company (LLC), is gaining in popularity because it allows owners to take advantage of the benefits of both the corporation and partnership forms of business. The advantages of this business format are that profits and losses can be passed through to owners without taxation of the business itself while owners are shielded from personal liability at the same time.
For more details and break downs, make an appointment with a business attorney. You can also read a great article featured in Entrepreneur Magazine entitled “Choosing Your Business Entity.”