If you're starting a business, carefully consider what business structure will be best for the type of business you plan to operate. Different corporate structures offer varying tax advantages. Another key consideration is liability (responsibility under the law): some business types protect owners from personal liability, while others do not.
The main business types and what they mean
Sole proprietorship:
The easiest and least expensive to create of the business structures, a sole proprietorship gives you complete control of your business. You receive all income from the business and pay taxes only on your personal tax return. On the downside, you will be personally responsible for the business's debts.
Partnership:
In a partnership, ownership is shared by two or more people. As with sole proprietorships, the owners receive the income and pay taxes only on their personal returns. There are several types, including general partnership, limited partnership, and joint venture. To avoid problems among the partners later, take time now to create a detailed partnership agreement that spells out exactly what each partner's responsibilities will be. The partners remain personally responsible for the business's liabilities (except for in a limited partnership, in which partners are not held personally responsible).
C Corporation:
A corporation is a separate entity from its owners and they are shielded from personal liability for corporate debts. However, C Corporations require more paperwork to create, and owners' income is taxed twice: the corporation pays tax on revenue, and the owners pay tax on their individual tax returns. This problem can be partly solved by paying salaries to owners. If you are the only member of the corporation, you will be held personally responsible for the business's debts.
Supchapter S Corporation:
S Corporations are similar to C Corporations with one big difference: the tax impact. S Corporation shareholders avoid double taxation and are permitted to have their earnings and profits pass directly to their personal tax returns.
Limited Liability Company (LLC):
This relatively new business type is gaining in popularity because it provides the liability protection of a corporation but offers the tax advantages and operating flexibility of a partnership. However, note that LLCs are not available in all states. Also, if you are the only member of the LLC, you will be held personally responsible for the business's debts.
Forming a business
If you are forming a business, registering it with the Secretary of State is a relatively simple and inexpensive process. It can be done on your own, usually through your secretary of state's Web site. However, if you are creating one of more complicated corporate structures, such as a partnership, corporation, or LLC, you should get legal counsel to make sure the company is formed in the most advantageous way. Qualified lawyers will be able to accurately prepare the documentation in a way that ensures you set up your business exactly as desired.
What it may cost to form a business
Filing/administration fees vary by state, so it's best to check your Secretary of State's Web site for accurate information. You can get low-cost or free advice on business structures through your local Small Business Administration (SBA) office, SBA Small Business Development Center, or through the SBA's Service Corps of Retired Executives (SCORE). If you hire an attorney to help with the process, you will be charged for his or her services. Attorneys' fees depend on their experience and areas of expertise.
Related Legal Guides:
Incorporating a Business
Articles of Incorporation
Bylaws
For more information visit avvo.com