Before you start a business, the first thing to consider is the business structure. To know which is best for your business, we will be discussing some of the facts about business structures.
What is a Business Structure?
A business structure is the blueprint of your business with regard to the ownership, profit sharing, and liability sharing. Your business structure will depend on the number of owners involved and also the share percentage that each will have.
Options to Choose From
There are three general types of business structures to choose from namely the sole proprietorship, the partnership business, and the corporation. This would then further branch into subcategories. Those subcategories include a limited partnership, limited liability corporation, C corporation, and S corporation.
Pros and Cons
In order to know which option would be the best to choose from, you have to first know the pros and cons of each business structure. Let’s start first with the three most basic ones then go on to the subcategories.
The sole proprietorship is the easiest of the three to start up. It does not require any government fees, forms or corporate tax because you will be managing everything on your own. All of your profit will be going straight to you. Although everything is easy to manage, the legal arm won’t be so supportive with regard to liabilities. This means that if you do incur any liabilities, then your creditors can run after your personal assets as well.
For a partnership business, you’ll be having partners to help out with your business. For the purpose of gaining profits, a partnership business is composed of two or more partners. The good thing about a partnership is that they are very easy to form legally. As with the sole proprietorship, there will be no corporate tax. It is also beneficial to each partner because, in the event of any hardship, partners have each other to rely on.
The con, however, just like the sole proprietorship businesses, is that partnerships may have liabilities that can extend to the partners. This means that liabilities incurred by the business may affect the assets of each partner. There are cases, however, wherein partners may escape this personal liability.
Such is the case for a limited liability company or an LLC. An LLC is a subcategory of a partnership. With an LLC the owners’ personal liabilities are limited so that their personal assets will have a chance of being safe. With the condition that none of the partners have committed anything illegal.
Another option of the partnership model would be the limited partnership business. Some of the partners can escape personal liabilities that usual partners have. General partners will be partners that have to shoulder the personal liability that these limited partners do not have.
A corporation is a business wherein five or more shareholders will be sharing ownership of a company. Unlike a partnership or sole proprietorship business, a corporation is a separate entity from the shareholders. Due to this, the liabilities of the corporation will not extend to the personal assets of the owners.
The con of a corporation is that both the corporation and the individual shareholders have to pay separate taxes. This results in double taxation for a corporation. Due to this, owning a corporation is actually more expensive than owning a sole proprietorship or a partnership business.
There are two subcategories of corporations namely the C corporation and the S corporation. A C corporation is wherein you create a pool of money, shareholders will contribute to the pool, and are each given stocks. The difference between the two is that the IRS taxes the owners separately with the C corporation since it is a different entity. The S corporation has a different and unique tax entity with the IRS.
One of the most important decisions you will make when you open your business is choosing a business structure. This will all depend on your business style as well your funds. If you need extra help, you might want to check guides online. You will find that the Form 8832 instructions are really helpful in aiding you in starting a business. There are also many articles that can help you in with choosing your business structure.