Of all the choices that you can make when starting up your own business, choosing the right legal structure for your company is the most important. Not only will the legal structure affect the amount of paperwork you do and the personal liability you face, but also affect your taxes.
Types Of Business Entities
A sole proprietorship is the most common type of business because it is easy to form and gives you complete managerial control. However, it also means that you will be held personally liable for the financial obligations of the business.
A partnership structure involves two or more persons who agree to share the losses and profits that the business incurs. The main advantage of forming a partnership is that your business will not bear the benefit of losses or tax burden of profits, as they are passed on to individual partners.
A primary disadvantage of partnerships is that each partner will be held personally liable for the business’s financial obligations.
A corporation is a legal entity made to conduct business. Since it handles the responsibilities of the business on its own, a corporation is a separate entity from its founders. Just like a person, the entity can be held legally responsible for its actions and taxed.
The main advantage of forming a corporation is the avoidance of personal liability. On the other hand, it is expensive to form and requires extensive record keeping.
(LLC) Limited Liability Company
A limited liability company or LLC is like a hybrid form of a partnership that allows the owners to benefit from the corporation and partnership bits of the business. Profits and losses realized by this business entity can be passed onto the owners without taxation while shielding them from personal liability.
Selecting A Business Entity
When deciding on the best business entity for you, follow these criteria:
Legal liability – To what extent do you wish to be insulated from legal liability? If you do not want to take on any personal liabilities, you should avoid partnerships and sole proprietorships.
Does your business lend itself to possible liability? If it does, you should ask yourself whether you could afford the risk of such liabilities.
Tax implications – Based on your goals and personal situation, are there any opportunities for minimizing taxation? When it comes to corporations, double taxation is a major disadvantage. However, you can avoid this by having S corporation status.
Ongoing administration and formation costs – Tax benefits might not offer enough advantages to offset the cost of doing business as a corporation. Moreover, the costs of record keeping and incorporation might be too much to handle. Handling administrative tasks might eat up your time, creating costs for your business.
Flexibility – As a business owner, your goal is to maximize the business structure’s flexibility by looking at your unique business needs. Personal needs are an important consideration.
Moreover, no two businesses are alike, especially those with multiple owners. This is because people tend to have different goals.
Future needs – When starting a business; you can easily be caught up in the moment. You will not be thinking about the future needs of your business. However, you need to consider all possible scenarios when choosing a business entity. What will happen to your beloved business once you die?
These are all the things that you need to consider when selecting a business entity. Make sure to check out the laws about corporations in your state for guidance.
For instance, if you happen to be a Delaware resident, you should do a Delaware business entity search to make the best possible decision for your area of residence. This will allow you to see how many similar businesses there are in your region. You might end up doing what everyone else is doing.