So you have taken the leap into the world of entrepreneurship. Have you spotted a void in the market and have a clear business plan and goal? Did you determined the company’s name and even possibly have your website up and running (yes, it’s a good idea to have a site)? If so, it may be time to choice from several different types of business structures, each with its own advantages and restrictions. Here are your options:
Sole Proprietorship: is the simplest and cheapest form of business in which a single owner or couple runs a company and is liable for its debt. Your personal and business assets become one in the same reporting losses and profit of the company on your own taxes. An owner can freely transfer ownership and stake in their company.
Limited Liability Company/Corporation (LLC): are combinations of sole proprietorship and corporation structures allowing liability freedom with tax privileges. It separates member’s assets from the business’s so you will not take a personal loss on debt. The company is taxed as its own entity. It is also flexible allowing several members but doesn’t allow stock to be transferred between them.
General Partnership: is an inexpensive arrangement between two or more owners of a business. Like a sole proprietor they are personally responsible for all loss, profit and debt. They are also liable for any of their partner’s portion of debt. Although the company is not taxed, each partner is on income earned.
Limited Liability Partnership: are mixtures of corporations and partnerships. Like LLCs each partner’s personal assets are separate from the company but they are also not liable for partners debt.
C Corporation (Inc. or LTD.): is the most complex and expensive of the structures and makes up the majority of major companies. Owners act as shareholders taking no responsibility for company debt, which serves as a separate entity. Corporations are required to issue stocks, hold annual meetings, record those meetings minutes and elect board members or directors. Earnings are paid in dividends that can be re-invested into the company or paid out.
S Corporation: has the same structure as a C corporation but shareholders elect to attain all profit, loss, deduction and credits. The company pays no federal tax as owners report business finance on their personal taxes.
Each structure has its pros and cons, mainly liability protection. Your personal situation will determine the best route and a growing company can always change its structure to fit future needs.