Forms Of Business

One of the most important decisions that every potential business owner must make is the proper form of the business, or setting a business up in the correct legal form for maximum protection and tax purposes. Below you will find a short discussion about the advantages and disadvantages of each form of business.

Sole Proprietorship

A sole proprietorship is by far the easiest form of business to start and operate, but it also involves one of the largest drawbacks, especially as the business grows. In most, if not all, jurisdictions, you don't have to file any forms or even apply for a permit to start a sole proprietorship. The process is as simple as just opening for business. There are still many things that you must do in the course of business, such as keeping records and taking care of taxes, both sales tax and the tax on the profits of the business. Speaking of business taxes, this is one of the great advantages of the sole proprietorship. All business income and expenses are treated at the individual tax rates, which tend to be advantageous for your bottom line (profit). The most prominent drawback to the sole proprietorship is the liability issue. In a sole proprietorship, the owner is personally liable for all business losses and any other liabilities such as lawsuits and other legal action.

To take a quick look at the advantages and disadvantages of any form of business, just look at how it is taxed and the amount of liability that the owner assumes. The important information for the sole proprietorship is that it is taxed at the individual rate, which is good, and the owner has unlimited liability, which is not good.

Partnership

A partnership is very similar to a sole proprietorship, in that it is taxed at the individual level and there is unlimited liability for at least one of the owners. In many partnerships, all of the partners have unlimited liability. The only way for one of the partners to gain limited liability is if they only contribute a certain item, usually money, to the partnership, have no role in the day-to-day operation of the business and the partnership agreement clearly states that they are only liable for their contribution.

Though it is not required by law in all jurisdictions, it is very important to have a written agreement whenever you form a partnership. This agreement should be very thorough and cover every possible aspect of the business relationship including the duties and responsibilities of all parties involved, the way any profit from the business will be distributed and what will happen to the business if one of the partners wishes to end their business relationship or dies.

In summary, partnerships are slightly more difficult to form than sole proprietorships, though not much more so, are taxed at the individual rate (good) and offer no liability protection for the owners (not so good) in almost all cases.

Corporation

Most businesses that we see in the news and in our everyday life are corporations of one sort or another. There are three main types of corporations, C corporations, LLC corporations and subchapter S corporations. Below are the highlights of each form of corporation. Like most things that you find on the Internet about business, I suggest seeking the advice of an attorney and accountant for specific advice about forming any type of business.

Subchapter S Corporation

The subchapter S corporation used to be the small corporation form of choice before the introduction of the LLC. It offers the advantage of profits being taxed at the individual level while offering the limited liability of a corporation. The correct way to enter into a subchapter S corporation is to form a C corporation and then apply for the S designation. The S designation is basically a tax designation, so you need to see an attorney and/or accountant when doing so. There are some limits to a subchapter S corporation such as the number of owners that make the LLC a better choice for many businesses while giving the same benefits, so the S corporation is not used very often today. My recommendation is to investigate an LLC first, as it will probably be the best choice.

LLC Corporation

Limited Liability Company

A limited liability company, or LLC as it is often called, offers the same advantages of a subchapter S corporation in limited liability for the owners as well as the ability to pass profits and losses to the personal income tax level of the owners. An LLC is relatively easy to set up, and you can do it yourself or use an attorney. The LLC has become very popular among new business start ups over the last few years. The major drawbacks to the LLC are the problems in acquiring growth capital if the business needs to expand. An LLC cannot sell stock on the public markets or have an IPO, or initial public offering, of stock. This greatly hinders the ability to raise capital. It is fairly easy to transform an LLC to a C corporation though, so it is a good choice for many small businesses.

C Corporation

Most businesses that are household names are C corporations. These are the companies that can sell stock on the exchanges like the New York Stock Exchange. C corporations offer the best protection for the owners, but usually the poorest tax treatment as they are taxed at the corporate level. This creates what many refer to as double taxation, but this is not always the case. C corporations offer the easiest route to acquiring expansion capital, are the most expensive businesses to form and almost require an attorney to set up.

Business Information

Interesting Information

Business Information

Quotes

How To Information

Interesting Facts

Medical Information

Investment Information

Miscellaneous

Contact

Your Ad Here

Free Bingo Bonus Your Ad Here