Finding the Right Business Structure

Of all the choices you make when starting a business, one of the most important is the type of
legal structure you select for your company. Not only will this decision have an impact on
how much you pay in taxes, it will affect the amount of paperwork your business is required
to do, the personal liability you face and your ability to raise money.

Types of Business Entities 

The type of business entity you choose will depend on three primary factors: liability,
taxation and record-keeping. Here's a quick look at the differences between the most common
forms of business entities:

 A sole proprietorship is the most common form of business organization. It's easy to
form and offers complete managerial control to the owner. However, the owner is also
personally liable for all financial obligations of the business.
 
 A partnership involves two or more people who agree to share in the profits or losses
of a business. A primary advantage is that the partnership does not bear the tax burden
of profits or the benefit of losses-profits or losses are "passed through" to partners to
report on their individual income tax returns. A primary disadvantage is liability-each
partner is personally liable for the financial obligations of the business.
 
 A corporation is a legal entity that is created to conduct business. The corporation
becomes an entity-separate from those who founded it-that handles the responsibilities
of the organization. Like a person, the corporation can be taxed and can be held
legally liable for its actions. The corporation can also make a profit. The key benefit
of corporate status is the avoidance of personal liability. The primary disadvantage is
the cost to form a corporation and the extensive record-keeping that's required. While
double taxation is sometimes mentioned as a drawback to incorporation, the S
corporation (or Subchapter Corporation, a popular variation of the regular C
Corporation) avoids this situation by allowing income or losses to be passed through
on individual tax returns, similar to a partnership.
 
 A hybrid form of partnership, the limited liability company (LLC) , is gaining in
popularity because it allows owners to take advantage of the benefits of both the
corporation and partnership forms of business. The advantages of this business format
are that profits and losses can be passed through to owners without taxation of the
business itself while owners are shielded from personal liability.

Selecting a Business Entity

When making a decision about the type of business to form, there are several criteria you
need to evaluate.

When you're first starting out in business, it's not uncommon to be "caught up in the
moment." You're consumed with getting the business off the ground and usually aren't
thinking of what the business might look like five or ten-let alone three-years down the road.
What will happen to the business after you die? What if, after a few years, you decide to sell
your part of a business partnership?

Sole Proprietorship

The simplest structure is the sole proprietorship, which usually involves just one individual
who owns and operates the enterprise. If you intend to work alone, this may be the way to go.

The tax aspects of a sole proprietorship are especially appealing because income and
expenses from the business are included on your personal income tax return (Form 1040).
Your profits and losses are first recorded on a tax form called Schedule C, which is filed
along with your 1040. Then the "bottom-line amount" from Schedule C is transferred to your
personal tax return. This aspect is especially attractive because business losses you suffer
may offset income earned from other sources. As a sole proprietor, you must also file a
Schedule SE with Form 1040. You use Schedule SE to calculate how much self-employment
tax you owe.

There are a few disadvantages to consider, however. Selecting the sole proprietorship
business structure means you're personally liable for your company's liabilities. As a result,
you're placing your own assets at risk, and they could be seized to satisfy a business debt or
legal claim filed against you.

Raising money for a sole proprietorship can also be difficult. Banks and other financing
sources are reluctant to make business loans to sole proprietorships. In most cases, you'll
have to depend on your own financing sources, such as savings, home equity or family loans.

Partnership

If your business will be owned and operated by several individuals, you'll want to take a look
at structuring your business as a partnership. Partnerships come in two varieties: general
partnerships and limited partnerships. In a general partnership, the partners manage the
company and assume responsibility for the partnership's debts and other obligations. A
limited partnership has both general and limited partners. The general partners own and
operate the business and assume liability for the partnership, while the limited partners serve
as investors only; they have no control over the company and are not subject to the same
liabilities as the general partners.

One of the major advantages of a partnership is the tax treatment it enjoys. A partnership
doesn't pay tax on its income but "passes through" any profits or losses to the individual
partners. At tax time, each partner files a Schedule K-1 form, which indicates his or her share
of partnership income, deductions and tax credits.

Limited liability companies, often referred to as "LLCs," have been around since 1977, but
their popularity among small-business owners is a relatively recent phenomenon.

An LLC is a hybrid entity, bringing together some of the best features of partnerships and
corporations. 
Like partnerships, LLCs do not have perpetual life. Some state statutes stipulate that the
company must dissolve after 30 or 40 years. Technically, the company dissolves when a
member dies, quits or retires.

Despite the attractions, LLCs also have their disadvantages. Since an LLC is relatively new,
its tax treatment varies by state. If you plan to operate in several states, you must determine
how a state will treat an LLC formed in another state. If you decide on an LLC structure, be
sure to use the services of an experienced accountant who is familiar with the various rules
and regulations of LLCs.

We, at companyvakil provide you great advice over which company form to prefer for
startup. We provide the most reliable service in town and stand to be one of the best in
business.