The type of legal structure you choose for your establishment is probably the most important of all the decisions you make when starting a business as it is also important when we talk about computing your taxes.
Moreover, aside that this decision has a huge effect on your tax payments, the type of your business will also affect the amount of paperwork your business has to do, your ability to earn money and the personal liability you meet.
You have to make your choice wisely because each business form comes with different tax consequences. You should choose the structure that most closely matches your company's needs.
Below are the 3 basic business structures:
Sole Proprietorship
The simplest structure which only involves just one individual who owns, at the same time operates the entire business is sole proprietorship. For those who want to have business alone, this structure can be good for you.
This status automatically comes as long as you are the sole owner of your enterprise. You do not have to take any formal action to form a sole proprietorship.
Advantages of Sole Proprietorship:
- Easy to manage and less expensive to create - with this type of business structure, costs is minimal, with legal costs limited to obtaining the needed permits and license.
2. Total Control - you don't have to consult with anyone else when you need to make decisions or changes. Thus, you have complete control over your business decisions because you are the sole owner.
- Easy Tax Preparation - because there is no legal separation between you and your business, your tax reporting requirements are easy to fulfil. With sole proprietorship, you can get the lowest tax rate of all the business structures.
Disadvantages of Sole Proprietorship:
* Unlimited personal liability - you can be personally liable for the liabilities and obligations of your company because there is no legal separation between you and your business.
2. Difficulty in raising capital - banks and other lending institution are hesitant to lend to a sole proprietor because they are perceived to have lack of credibility when it comes to repayment of the business fails.
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.
* Limited Partnerships - they more complex than general partnership because they allow partners to have limited liability as well as limited input. These limits will depend upon each partner's investment percentage.
- Limited Partnerships - are more complex than general partnership, wherein it allows partners to have limited liability as well as limited input that depend upon each partner's investment percentage.
3. Joint ventures - for a limited period of time or for a single project, partners act as general partners. They can be recognised as ongoing partners if their venture continues but they must file as such.
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.
In fact, there are increased paperwork and recordkeeping burdens associated with this business structure. You will probably need an assistance of an attorney to guide you when starting a corporation because this business type is formed under the laws of the state in which it is registered.
Moreover, aside that this decision has a huge effect on your tax payments, the type of your business will also affect the amount of paperwork your business has to do, your ability to earn money and the personal liability you meet.
You have to make your choice wisely because each business form comes with different tax consequences. You should choose the structure that most closely matches your company's needs.
Below are the 3 basic business structures:
Sole Proprietorship
The simplest structure which only involves just one individual who owns, at the same time operates the entire business is sole proprietorship. For those who want to have business alone, this structure can be good for you.
This status automatically comes as long as you are the sole owner of your enterprise. You do not have to take any formal action to form a sole proprietorship.
Advantages of Sole Proprietorship:
- Easy to manage and less expensive to create - with this type of business structure, costs is minimal, with legal costs limited to obtaining the needed permits and license.
2. Total Control - you don't have to consult with anyone else when you need to make decisions or changes. Thus, you have complete control over your business decisions because you are the sole owner.
- Easy Tax Preparation - because there is no legal separation between you and your business, your tax reporting requirements are easy to fulfil. With sole proprietorship, you can get the lowest tax rate of all the business structures.
Disadvantages of Sole Proprietorship:
* Unlimited personal liability - you can be personally liable for the liabilities and obligations of your company because there is no legal separation between you and your business.
2. Difficulty in raising capital - banks and other lending institution are hesitant to lend to a sole proprietor because they are perceived to have lack of credibility when it comes to repayment of the business fails.
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.
* Limited Partnerships - they more complex than general partnership because they allow partners to have limited liability as well as limited input. These limits will depend upon each partner's investment percentage.
- Limited Partnerships - are more complex than general partnership, wherein it allows partners to have limited liability as well as limited input that depend upon each partner's investment percentage.
3. Joint ventures - for a limited period of time or for a single project, partners act as general partners. They can be recognised as ongoing partners if their venture continues but they must file as such.
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.
In fact, there are increased paperwork and recordkeeping burdens associated with this business structure. You will probably need an assistance of an attorney to guide you when starting a corporation because this business type is formed under the laws of the state in which it is registered.
About the Author:
All companies need to to have the perfect business structure that is good for their nature and size. For more on business structures, visit the link above.
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