To begin, I am not a tax advisor, attorney, accounting firm, nor do I offer legal advice. This article was written as advice on the various business structure.
Please check with your state on the legal structure and requirements. Also check with an attorney and an accountant for the best structure for your business.
Corporation, Sole Proprietorship, LLC
So you want a business? Have you determined what you want? Home Office? Store Front? Internet Marketing? Mobile? You have many choices. Once you determine your business you need a structure. Many choices are available: Corporation, Sole Proprietorship, and Partnership. Which type is a personal preference, however check with your account and attorney to see which structure is best suited for your business. Great sources of information are: IRS.Gov, About.Com, and Score.Gov.
Let’s break down the choices.
I will save corporation to last because of the many choices. Sole Proprietorship: The most basic of all business legal structures is the sole proprietorship. For new start-ups the choice of becoming a sole proprietorship is the simplest of all business forms but is it the best? Learn the pros and cons of a doing business as sole proprietorship.
What Is A Sole Proprietorship?
A Business Of One
A sole proprietorship is a business of one without corporation or limited liability status. The individual represents the company legally and fully. Common proprietorship structures include part-time businesses, network marketing, MLM, on-line business, Internet business, direct sellers, new start-ups, contractors, and consultants. This form of business has several advantages. Choosing the best business structure for your business will depend on a host of individual factors including your type of business, tax situation, and industry liability, among others. Your choice of business structure will have legal and personal implications. Work with your business professional team of a lawyer and an accountant to determine the type of business structure best for you.
Advantages of a Sole Proprietorship
1. Quicker Tax Preparation: As a sole proprietor, filing your taxes is generally easier than a corporation. Simply file an individual income tax return (IRS Form 1040) including your business losses and profits. Your individual and business incomes are considered the same and self-employed tax implications will apply.
2. Lower Start-up Costs: Limited capital is a reality for many startups and small businesses.
3. Ease of Money Handling: Handling money for the business is easier than other legal business structures. No payroll set-up is required to pay yourself. To make it even easier, set up a separate bank account to keep your business funds separate and avoid co-mingling personal and business activities.
Disadvantages of a Sole Proprietorship
1. Personally Liable: Your small business proprietorship is personally liable for all debts and actions of the company. Unlike a corporation, your business doesn’t exist as a separate legal entity. All your personal wealth and assets are linked to the business. If you operate a higher risk business your chance of losing the business or law suit is greater.
2. Lack of Financial Controls: The looser structure of a proprietorship doesn’t require financial statements and maintaining company minutes as a corporation. The lack of accounting controls can result in the demise of your small business. No matter the legal structure of your business, take time to set up the proper financial statements for your company.
3. Lonely at The Top: Being a business of one can be lonely. All the decisions, actions, and results rest on you. Are you able to work alone and be productive?
4. Difficult to Raise Capital: Growing your small business may require raising cash to take advantage of new markets and more opportunities. As a sole proprietorship this can be very difficult as investors may not take you seriously.
Forming A Sole Proprietorship
The IRS perspective
From the IRS’s perspective, your small business is a sole proprietorship unless you have registered it as a corporation.
Setting up your proprietorship often does not require registration of the business. If you are planning to use another name or business name to operate your company, state laws will require a trade name registration or filing of your company name.
This is easy, you simply go to the court house and file your business name. The major advantage of sole proprietorship is that it is the simplest and least expensive structure, as there is really nothing to set up and maintain, except perhaps a fictitious business name (aka DBA, or Doing Business As).
Here is some great Small Business Information Resources:
Partners share with each other
My thanks to About.Com for assisting in this report.
A partnership is a type of business entity in which partners share with each other the profits or losses of the business.
Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the partners (i.e. there is no dividend tax levied). However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would under common law legal systems. The basic form of partnership is a general partnership, in which all partners manage the business and are personally liable for its debts.
Two other forms which have developed are the limited partnership (LP), in which certain limited partners relinquish their ability to manage the business in exchange for limited liability for the partnership’s debts, and the limited liability partnership (LLP), in which all partners have some degree of limited liability.
A silent partner is one who still shares in the profits and losses of the business, but who is uninvolved in its management, and/or whose association with the business is not publicly known; these partners usually provide capital.
One big advantage of a general partnership
General partnership advantage is that you don’t have to register with your state and pay an often hefty fee, as you do to establish a corporation or limited liability company. And because a general partnership is normally a “pass through” tax entity (the partners, not the partnership, are taxed unless you specifically elect to be taxed like a corporation) filing income tax returns is easy.
Unlike a regular corporation, there is no need to file separate tax returns for the corporate entity and its owners. But given that the business-related acts of one partner legally bind all others, it is essential that you go into business with a partner or partners you completely trust. It is also essential that you prepare a written partnership agreement establishing, among other things, each partner’s share of profits or losses, day-to-day duties and what happens if one partner dies or retires.
A major disadvantage of a general partnership
A major disadvantage of doing business as a general partnership is that all partners are personally liable for business debts and liabilities (for example, a judgment in a lawsuit). To help reduce this problem a good insurance policy can do much to reduce lawsuit worries.
There may horror stories with partnerships. One I was made aware of was when one partner ran up high personal debt and had to declare bankruptcy. When the creditors came after the individual, they also came after the partner. Since neither had an insurance policy or formal agreement the partner was also sued. Both lost everything including homes and some personal affects. Be careful when setting a partnership. Have a good lawyer, account and an agreement should one partner leave, die or becomes personally insolvent.
Limited Partnership
The basic structure and tax implications are the same as for a general partnership, but the limited partnership allows for one or more limited partners, or “silent partners”, to own a portion of the business, but not participate in the management of the business. The partnership must also have a general partner who has personal liability for all liabilities of the partnership. This structure allows a partnership to have outside investors without subjecting them to the liabilities of the business.
Limited Liability Partnership (LLP)
The LLP is a fairly new structure that appeared as a result from demand from attorney and accounting firms to be able to limit the liability between partners (attorney and accounting firms were at one time not allowed to incorporate, though they are now). An LLP is taxed like a partnership, but limits the liabilities of all partners much like an LLC. However, at this point in time, LLP laws vary significantly from state to state.
For example, California and New York only allow this form for attorney and accounting firms. In many other states, partners in an LLP only have a “limited shield”, and are not afforded the same protection they would enjoy in an LLC or corporation.
These restrictions make the LLP generally only a good choice for attorney and accounting firms, at least in the states with the limited shield law. Check with your Secretary of State for the specifics in your state.
Check the following for additional information:
Small Business Information Resources
10 Quick Tips to Improve Your Business
Here’s to your business success,
