Choosing between all the different business structures – LLC, partnership, sole proprietorship, or corporation – for your business can be difficult and will depend on your preferences and the type of your business.
Whenever you start a business, you will need to select an organization type from all the different business structures. This option determines how your business will be established and organized. In most cases, you will likely have a choice between a limited liability company (LLC), a partnership, a corporation, or a sole proprietorship.
Criteria for selecting the legal structure for your business
There are some criteria that you can use to find the business structure that works best for your purpose. These criteria are:
- The different types of liabilities that accompany each business structure
- The expenses and procedures associated with the establishment and maintenance of the different business structures
- Income tax
- Investment needs
Miscellaneous Liabilities
The general rule of thumb for this category is that the more dangerous or risky the activity your business engages in, the less personal responsibility you want to have.
Both corporations and LLCs allow business owners a type of “limited liability,” where anyone seeking claims against the business will have a difficult time placing personal liability on you as the owner. Conversely, if you were to organize your business as a partnership or as a sole proprietorship, you could be personally liable for anything the business did wrong.
Expenses and procedures
In general, there is no special paperwork that needs to be filed to establish any of these business structures. Additionally, fees associated with the establishment or maintenance of any of these business structures are rarely charged.
LLCs and corporations, on the other hand, are almost always more difficult and expensive to establish and maintain. To establish a corporation or limited liability company, you must file “Articles of Incorporation” with your secretary of state and pay the fees associated with incorporation. The details of the articles of incorporation and the amount of the fee will vary depending on the state where you establish your business.
Additionally, when deciding to form a corporation or LLC, business owners must decide which officers to choose to run the company. LLCs and corporations must keep specific and detailed records of any important business decisions and follow many other formalities that are associated with these business structures.
Income tax
The easiest way to think about the different income tax structures that these business structures will use is to divide them into two categories – one made up of those business structures where business owners pay taxes on business profits, and one that includes all business structures where business owners do not pay taxes on business profits.
The first category includes sole proprietorships, partnerships, and LLCs. These business structures are often referred to as “passive” tax entities because taxes on business gains and losses pass to business owners on their personal income taxes.
Sole proprietorship, partnership and LLC business owners must report and pay taxes on all net profits from their business, even if they do not take money out of the business account during the tax year.
Unlike passing through tax business, the owners of a corporation do not pay taxes on the net profits of the corporation. Instead, the business owners of a corporation pay taxes only on the profits they actually take from the corporation in the form of salaries, dividends, and bonuses.
Because a corporation is a separate taxable entity, it must pay taxes on any profit that remains within the company during a tax year, and also on any profit it pays in the form of dividends to shareholders.
There is a tax benefit to forming your business as a corporation. The owners of a corporation do not pay tax on any profits the corporation holds, and the corporation pays taxes at a lower rate than some individuals.
Investment needs
Structuring a business as a corporation allows a business to sell shares of ownership in the business through share offerings. This is different from the other three business structures, which do not allow the sale of a part of the business through the sale of shares. Due to this investment scheme, it can allow the owners of a corporation to attract investors and retain employees more easily by offering shares.
However, if you never plan for your business to go public, and you don’t need the investment incentives to retain employees, you probably don’t need to go through the additional procedure and cost of forming a corporation. If you want the limited personal liability that comes from a corporation, you could form your business as an LLC. An LLC provides many of the advantages of a corporation while remaining more flexible.
advice
Whether you are starting your new business, would like to move your business to a different legal structure, or have other questions regarding your business, you can greatly benefit from legal assistance.
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