Probably, the most important decision you make when starting your own business is to choose the type of legal structure you'll use for your enterprise. Furthermore, it is also important when we talk about computing your taxes.
Your business structure will also affect the amount of paperwork your business has to do, your ability to earn profit and the personal liability you face, aside from the fact that this decision has a huge influence on your tax payments.
Therefore, because each business type comes with different tax consequences, you should understand that you should choose the structure that most closely matches your company's needs and you have to make your decisions smartly.
Below are the 3 basic business structures:
Sole Proprietorship
Considered as the best business structure for those who want to have their own business because it only involves just one individual who owns, at the same time operates the entire business. Furthermore, it is also the simplest business structure.
Do you want to have this type of business? Well, you do not have to take any formal action to form a sole proprietorship. As long as you are the only owner of your business, this status automatically comes.
Advantages of Sole Proprietorship:
* Less costly and easier to form - with this type of business structure, costs are minimal, with legal costs limited to obtaining the needed permits and license.
- Exclusive control - you don't need to ask with anyone else when you need to make moves or changes. Thus, you have complete control over your business decisions because you are the only owner.
* Easy Tax Preparation - your tax reporting requirements are easy to fulfil because there is no legal separation between you and your business. With sole proprietorship, you can get the lowest tax rate of all the business structures.
What are its disadvantages?
- Unlimited personal liability - you can be personally liable for the debts and obligations of your establishment because there is no legal separation between you and your business.
- Difficulty to raise capital - because they are perceived to have lack of credibility when it comes to repayment of the business fails, banks and other lending institution are hesitant to lend to a sole proprietor.
Partnership
This structure is a kind of business where there are two or more people who share the ownership, liabilities and management.
Types of Partnerships
* General Partnerships - partners equally shares the profits, liability and management duties. If there's no equal distribution, the percentages assigned to every partner must be documented in the partnership agreement.
1. General Partnerships - partners equally shares the profits, liability and management duties. If there's an unequal distribution, the percentages assigned to every partner must be documented in the partnership agreement.
2. Limited Partnerships - are more complex than general partnership, which allows partners to have limited liability as well as limited input. These limits will depend upon each partner's investment percentage.
Corporation
Corporation
As a shareholder, your personal assets are protected from the corporation's debts and actions. Plus, corporations file taxes separately from their owners. The owners only pay taxes on corporate profits paid to them in the form of dividends and bonuses. Any additional profits are awarded a corporate tax rate, which usually lower than a personal income tax rate.
The owners only pay taxes on corporate profits paid to them in the form of dividends and bonuses. Shareholders' personal assets are protected from the corporation's debts and actions. Plus, corporations file taxes separately from their owners. Any additional profits are awarded a corporate tax rate, which is commonly lower than a personal income tax rate.
Disadvantages:
Because it is separate from its owners so it requires complying with more regulations and tax requirements, corporation is an independent entity owned by stakeholders. These are the reasons why this structure is more expensive and complex than most of other business structures.
A corporation is formed under the laws of the state in which it is registered and you will probably need an assistance of an attorney to guide you when starting a corporation. Furthermore, there are increased paperwork and recordkeeping burdens associated with this business structure.
Your business structure will also affect the amount of paperwork your business has to do, your ability to earn profit and the personal liability you face, aside from the fact that this decision has a huge influence on your tax payments.
Therefore, because each business type comes with different tax consequences, you should understand that you should choose the structure that most closely matches your company's needs and you have to make your decisions smartly.
Below are the 3 basic business structures:
Sole Proprietorship
Considered as the best business structure for those who want to have their own business because it only involves just one individual who owns, at the same time operates the entire business. Furthermore, it is also the simplest business structure.
Do you want to have this type of business? Well, you do not have to take any formal action to form a sole proprietorship. As long as you are the only owner of your business, this status automatically comes.
Advantages of Sole Proprietorship:
* Less costly and easier to form - with this type of business structure, costs are minimal, with legal costs limited to obtaining the needed permits and license.
- Exclusive control - you don't need to ask with anyone else when you need to make moves or changes. Thus, you have complete control over your business decisions because you are the only owner.
* Easy Tax Preparation - your tax reporting requirements are easy to fulfil because there is no legal separation between you and your business. With sole proprietorship, you can get the lowest tax rate of all the business structures.
What are its disadvantages?
- Unlimited personal liability - you can be personally liable for the debts and obligations of your establishment because there is no legal separation between you and your business.
- Difficulty to raise capital - because they are perceived to have lack of credibility when it comes to repayment of the business fails, banks and other lending institution are hesitant to lend to a sole proprietor.
Partnership
This structure is a kind of business where there are two or more people who share the ownership, liabilities and management.
Types of Partnerships
* General Partnerships - partners equally shares the profits, liability and management duties. If there's no equal distribution, the percentages assigned to every partner must be documented in the partnership agreement.
1. General Partnerships - partners equally shares the profits, liability and management duties. If there's an unequal distribution, the percentages assigned to every partner must be documented in the partnership agreement.
2. Limited Partnerships - are more complex than general partnership, which allows partners to have limited liability as well as limited input. These limits will depend upon each partner's investment percentage.
Corporation
Corporation
As a shareholder, your personal assets are protected from the corporation's debts and actions. Plus, corporations file taxes separately from their owners. The owners only pay taxes on corporate profits paid to them in the form of dividends and bonuses. Any additional profits are awarded a corporate tax rate, which usually lower than a personal income tax rate.
The owners only pay taxes on corporate profits paid to them in the form of dividends and bonuses. Shareholders' personal assets are protected from the corporation's debts and actions. Plus, corporations file taxes separately from their owners. Any additional profits are awarded a corporate tax rate, which is commonly lower than a personal income tax rate.
Disadvantages:
Because it is separate from its owners so it requires complying with more regulations and tax requirements, corporation is an independent entity owned by stakeholders. These are the reasons why this structure is more expensive and complex than most of other business structures.
A corporation is formed under the laws of the state in which it is registered and you will probably need an assistance of an attorney to guide you when starting a corporation. Furthermore, there are increased paperwork and recordkeeping burdens associated with this business structure.
About the Author:
All companies need to choose the best business structure that is best for them. For more on business structures, visit the link above.
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