The choices that you make when you think about starting your own business have long-term consequences. However, the most important thing you must choose, besides the name of the company and your business plan, is the type of business structure that you will file. This decision impacts your own personal liability and responsibility to the affairs of the company. It also dictates how tax filing will work and how you will be able to sustain your company finances. Give careful thought to this decision. Not all filing statuses are equal or have positive benefits. You should consider retaining legal advice or input from business professionals who understand the pros and cons that each business entity has to offer.
You should first understand the types of structures available for filing. Some are most common than others, but the three primary factors that will help dictate which is best for you include taxations, liability, and record-keeping.
Types of Ownership
- Sole proprietorship. By far, this is the most common business organization when it is a small company with a single owner. They are easy to form and allows the owner to remain in complete control. Unfortunately, the owner also becomes the only one responsible and personally liable for the debts and bills of the organizations.
- Partnership. This structure involves two or more people that sign a partnership agreement that details how the parties will share both the profits or losses of the business. In a partnership, the overall losses and profits get passed to the individual partners for reporting on their personal tax returns, rather than a company filing. This can be also a downside to the entity, as the financial liabilities are shared with each partner, whether positive or negative.
- Corporation. This legal entity has several forms, although they are created for the intent of conducting business. This filing status establishes a separate entity, known as a corporation, the is legal responsibility for its own operations rather than placing the responsibility on the owners of the company. A corporation is taxed and bears its own legal liability concerns. A corporation is also allowed to earn a profit.
- Limited liability company (LLC). It is becoming more popular to create an LLC because it offers owners the benefits of both a partnership and corporation filing status. Profits and losses are earned by the owners without the business itself being taxed. It also keeps the owners from bearing any personal liability for the operations of the company, although many still choose to carry liability insurance as a precaution against client or customer claims and lawsuits.
Choosing Your Entity
- Legal liability. If you are concerned about the potential to lose your personal assets, this will impact which filing status you choose. Determine the potential liabilities of the company, and ask yourself whether or not you can afford to take that risk.
- Tax implications. Whether you approach the top of taxes from an individual perspective or along the lines of a business owner, you will want to minimize taxation. This allows you to keep more of your money. This is an area where the more informed decision can come through the advice of an accountant or tax professional.
- Startup and administrative costs. Although you may enjoy some tax advantages for your filing status, it may be enough of a financial boost to continue operating your business if you are choosing to file as a corporation. The amount of paperwork, record-keeping, and incorporation costs, can be a significant deterrent for small business owners.
- Flexibility. The overall goal is to consider the needs of the business and how they align with the needs of the owner. Being able to remain flexible for adapting and altering to meet the needs of multiple owners might be the best initial investment in filing status, rather than alter arrangements and encounter tax problems.
- Future needs. Think beyond the immediate task of getting your business going. Think about the future of the company and your five or ten-year goals. The issue of ownership can become quite a headache down the road if you ever choose to sell your company.
When you are going to make the decision regarding your business structure, there are several things to keep in mind. Some of them take more priority than others, but all of these areas should be carefully considered.
Think carefully before making a decision with your company. Seek professional advice to avoid future complications.