Like any new business owner, you must be thinking about the best business identity for your venture. The answer to this question is simple and lies within these two; legal liability and tax consideration.
When starting a business, it will be the most important consideration that you will have to decide on that whether you will be starting the business all by yourself or with a partner and how will you seek shelter from high taxes. The best way to understand taxes and how you can save yourself from paying extra amounts of your hard earned money in taxes is to first decide your business entity or basic business structure. This will help greatly in deciding what type of business you are running and how much should you be paying in taxes.
Types of Business and Their Basic Structures
There are various types of businesses depending on their structures and they way they are set up and operated. Some of the business structures are:
- Sole proprietorship
- General partnership
- Limited partnership
- Corporation
- Limited liability company
Sole Proprietorship
Sole proprietorship is one of the quickest and easiest ways to set up a business venture. There are no prerequisites or any specific costs for starting a sole proprietorship. While there will be some minor formalities, they can be addresses depending on your state or jurisdiction and the formalities will not be too hard to fulfill.
You will need the following things to set up a sole proprietorship business such as:
- Permit to set up a business
- Business license
- Registration number of your business or application if you are buying a franchise to monitor the collection of sales tax
All these processes are very simple and can be done without hiring an attorney or accountant regardless of any state you are setting up your business. You are the sole owners and have full control and responsibility for the operation
General Partnership
Starting up a general partnership business is also an easy process as it doesn’t need any formalities or prerequisites. However, it is important that you should have a detailed contract or partnership agreement if you are doing business with another individual for safety reasons and smooth sailing.
Some of the important points to be considered in a general partnership business are:
- The amount of capital each partner will invest
- The rights and duties of each partner
- The method for sharing profits and losses
- The authorization for cash withdrawals and salaries
- The methods for resolving disputes or taking in new partners
The most important thing when it comes to establishing a general partnership business structure is the method for dissolution of business if it becomes necessary as in most of the cases this is the main point of dispute.
Limited Partnership
A limited partnership just like a general partnership except there is an important fundamental difference. The limited partner is protected by law as the limited partner's legal liability in the business is generally limited to the amount of his or her investment.
It enables the investor to share the partnership profits without being exposed to its debts even if the company goes out of business. This exists as long as the limited partner does not play an active role in the partnership operation.
Corporation
A corporation is an artificially created legal entity that exists separate and apart from people who create it and operate it. With as little as one incorporator, a corporation can be formed by simply filing an application for a charter with the respective state.
Some of the important facts needed to file an application for forming a corporation are:
- The purpose of intended corporation
- The names and addresses of the incorporators
- The amount and types of capital stock the corporation will be authorized to issue
- The rights and privileges of the holders of each class of stock
There are various pros and cons to operating your business structure as a corporation. However, it can be started as deemed necessary by the interested parties.
Limited Liability Company (LLC)
This is the latest type of business structure gaining popularity in the market. LLC is now the preferred choice in many situations where legal liability protection is a primary concern and a simple one time tax on the owners is preferred to dealing with cumbersome corporate tax liability
An LLC is a hybrid entity that has the legal protections of a corporation and the ability to be taxed (one time) as a partnership. Don’t forget to ask your lawyer or accountant about the advantages of the LLC in your state. Ask up front what it would cost to form a corporation versus the cost of forming an LLC. You may be surprised to learn that in some states an LLC could be established by filing a simple, one-page document with the secretary of state.
All these are the basic types of business structures that help you understand how the market operates and plan your venture among the big and old players. It is important that you understand the pros and cons of each of these business structures offers and how you can make the best of them for greater profits and smooth sailing.
