One of the first decisions that you will have to make as a business owner is how the business should be structured. All businesses must adopt some legal configuration that defines the rights and liabilities of participants in the business’s ownership, control, personal liability, life span, and financial structure. This decision will have long-term implications, so you may want to consult with an accountant and attorney to help you select the form of ownership that is right for you. Show
In making a choice, you will want to take into account the following:
An overview of the four basic legal forms of organization: Sole Proprietorship; Partnerships; Corporations and Limited Liability Company follows. Please also review this summary of non-tax factors to consider. Sole ProprietorshipThe vast majority of small businesses start out as sole proprietorships. These firms are owned by one person, usually the individual who has day-to-day responsibility for running the business. Sole proprietorships own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, you are one in the same with the business. Advantages of a Sole Proprietorship
Disadvantages of a Sole Proprietorship
PartnershipsIn a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. The Partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed. Yes, it’s hard to think about a “break-up” when the business is just getting started, but many partnerships split up at crisis times and unless there is a defined process, there will be even greater problems. They also must decide up front how much time and capital each will contribute, etc. Advantages of a Partnership
Disadvantages of a Partnership
Types of Partnerships that Should Be Considered:1. General partnership 2. Limited partnership and partnership with limited liability 3. Joint venture CorporationsA Corporation, chartered by the state in which it is headquartered, is considered by law to be a unique entity, separate and apart from those who own it. A Corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes. Advantages of a Corporation
Disadvantages of a Corporation
Subchapter S CorporationA tax election only; this election enables the shareholder to treat the earnings and profits as distributions, and have them pass through directly to their personal tax return. The catch here is that the shareholder, if working for the company, and if there is a profit, must pay his/herself wages, and it must meet standards of “reasonable compensation”. This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount. Limited Liability Company (LLC)The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to provide limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership. The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued if desired by a vote of the members at the time of expiration. LLC’s must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests. Federal Tax Forms for LLCTaxed as a partnership in most cases; corporation forms must be used if there are more than 2 of the 4 corporate characteristics, as described above. In summary, deciding the form of ownership that best suits your business venture should be given careful consideration. Use your key advisors to assist you in the process. In which type of business the owner is responsible for all debts?The sole proprietorship is the simplest business form under which one can operate a business. The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts.
Which business types require owners to be personally responsible for business expenses and debts?Sole proprietorships do not produce a separate business entity. Your business assets and liabilities are not separate. Sole proprietors include both their business expenses and personal income on their personal tax return. Sole proprietors are liable for the business's liabilities, debt, and losses.
In which form of organization is the owners legal responsibility for the debt of the business limited to the amount they invested in the business?A limited partnership has a single general partner who runs the business and is responsible for its liabilities, plus any number of limited partners who have limited involvement in the business and whose losses are limited to the amount of their investment.
What form of business does not protect personal assets?Sole proprietorships and partnerships offer no protection of personal assets from business liability exposure. With these business types, a lawsuit against your business may expose your home, car, bank account and everything you have worked so hard for.
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