Before you decide, the first step is to learn a little more about the business structure options available to you and the pros and cons of each option. Common examples of business structures include corporations, partnerships, holding companies, not-for-profit organizations, subsidiaries, and limited liability companies. Here are some examples: Liability: A corporation is a legal entity that is “immortal,” meaning it does not end with the death of the shareholder. The shareholders of the company have limited liability because they are not personally responsible for the debts and obligations of the company. Shareholders cannot lose more money than the amount they have invested in the business. Like the provisions of an LLC, shareholders must be careful not to “penetrate the corporate veil.” Personal checking accounts should not be used for commercial purposes and the company name should always be used when interacting with customers. An S Corporation (S Corp) is an alternative to C Corp, where the profits and losses of the corporation are passed on to shareholders and must be reconciled in their individual tax returns. When starting a business, choosing a suitable business structure allows your business to be officially legally recognized and provide guidelines for business management. A sole proprietorship is a company without legal capacity that belongs to a single person. Freelancers and many other self-employed individuals legally operate a sole proprietorship. Another aspect of a partnership is that each of the individual partners can legally bind the company to a contract, although the other partners may disagree or are not even aware of it. Between the responsibility for the company`s debt and the ability of each partner to tie the partnership to the contracts, it is crucial to trust everyone you want to partner with and make sure that your personalities complement each other and that you can work together.
Because of this distinct status, the company itself pays taxes; The income is not reflected on the owners` tax returns. Owners would pay taxes, just like any other employee of a company: on the money they receive for salaries, bonuses and other benefits. One thing to keep in mind is the potential for double taxation. As an owner, you would pay taxes on the salary you receive from the company, but you would also pay taxes on the company`s profits. In many ways, this type of structure offers the benefits of a business and a partnership. Owners are protected from personal liability, as they would in a corporation, but an LLC follows the lean structure of a partnership. To form an LLC, you need to file with your state, and some states also require an operating agreement that resembles a partnership agreement. LLCs cannot sell shares, although you can transfer a percentage of ownership to outside investors. Incorporation: Sole proprietorship is the easiest way to do business. The cost of setting up a sole proprietorship is very low and very few formalities are required. Companies are the most complex business structure.
A company is a legal person that is distinct and independent of the persons who own or manage the company, namely the shareholders. A company has the ability to enter into contracts separate from those of the shareholders, but it also has certain responsibilities such as paying taxes. Businesses are generally more suitable for large, established businesses with multiple employees or where other factors apply (for example, if a business sells a product or provides a service that could expose the business to significant liability). Ownership is determined by the issuance of shares. Disadvantages of businesses: • The process of starting the business is stricter and more expensive. • Profits are subject to “double taxation”, which means that profits are taxed at the corporate level and at the individual level when distributed to shareholders. • High level of governance and oversight by the Board of Directors. Why would you opt for an LLC instead of an S company? Filing as an LLC means less paperwork and less cost to get started. There are also fewer restrictions on how the profits of an LLC are distributed among its members. On the other hand, like partnerships, when a member leaves, the company is dissolved in many states, although you can include provisions on this in your operating agreement. “If you want to be your own boss and run a home-based business without a physical storefront, you can have full control with a sole proprietorship,” said Deborah Sweeney, CEO of MyCorporation.
“This company doesn`t offer separation or protection of personal and business assets, which could prove to be a problem as your business grows and more and more aspects hold you accountable.” A corporate structure is a category of organizations that is legally recognized in a particular jurisdiction and is characterized by the legal definition of that particular category. The main types of companies are C-Corporation and S-Corporation. A C company exists as a separate legal entity from its owners, while an S company consists of a maximum of 100 shareholders and can operate as a partnership. Choosing a sole proprietorship business structure has several advantages. First of all, it is inexpensive to get started, and there are minimal fees when a sole proprietorship is registered. In most states, the only costs associated with operating a sole proprietorship are business taxes and business license fees. While small businesses may be LLCs, some large companies choose this legal structure. An example of LLC is Anheuser-Busch Companies, one of the leaders in the beer industry in the United States. Headquartered in St.
Louis, Missouri, Anheuser-Busch is a wholly owned subsidiary of Anheuser-Busch InBev, a multinational brewery based in Leuven, Belgium. A company or company C is an independent entity for legal and tax purposes, distinct from the natural persons who own or operate it. A company can raise funds by selling shares, and a company will continue indefinitely, even if one of the shareholders dies or sells its shares. Business owners are not personally responsible for the company`s financial obligations, nor are they personally liable for lawsuits. Want to know the other steps to start a business? Check out our blog post “11 Steps to Starting a Business in Tennessee or Alabama.” When filing taxes, the company`s profits and losses are passed on to the partners, and each partner is required to report the information on Form 1065 with their personal tax returns. In addition, partners must pay a tax on self-employment based on their share of the company`s profits. Schedule K-1, which records gains or losses, must be attached to Form 1065.