Financial freedom: It’s so close that you could taste it. You’ve uncovered the perfect niche to start a business in — all you need now is to get it off the ground and start making revenue happen.
But you face a daunting prospect: registration. Easily one of the most inhibiting steps in starting a company, figuring out which of the many business legal structures your company should fit into shouldn’t be as daunting to you as it is for most people.
In this article, you’ll learn about each business legal structure and how to figure out which is the best legal structure for small businesses.
Up first is the sole proprietorship, which allows you to maintain complete control over your business. This legal structure doesn’t create a separate taxable entity: you and your sole proprietorship are the same in IRS eyes.
You’ll pay taxes both on personal income from other sources and business income from your sole proprietorship. However, this also means that your personal assets are liable should you ever go bankrupt (knock on wood).
In a general partnership, all partners are equal co-owners of the company. Taxes are paid only at the personal income level, which makes a general partnership a good option if you have several different partners going in on the business together.
General partners assume liability and risk for the company.
In a limited partnership, both general and limited partners are present. Limited partners obviously have less legal say in the business’s operations, but they also assume less risk and responsibility.
If the company goes bankrupt, the limited partners’ personal assets never go up for grabs, while the general partners’ may.
Limited Liability Corporation
A limited liability corporation (more commonly referred to as an LLC), merges the pros of each of the above three business legal structures.
The company will avoid double taxation as income is only taxed at the personal level. In addition, all of the partners can act as limited partners in that they don’t have any personal responsibility if the company goes under. No personal assets will be at risk.
A C corporation creates a separate business entity. Most of the large brands that you’ve heard of are registered as C corporations.
The principal benefit of a C corporation is that this legal structure enables very complicated ownership (many different shareholders, international holdings, public companies, etc.). However, the creation of a separate business entity means double taxation, both at the corporate level as well as at the personal level.
An S corporation takes some of the benefits of the C corporation, but without double taxation. It sounds like a dream world for many corporations, but the unfortunate reality is that the company has to meet a very stringent set of requirements in order to be registered as an S corp.
These requirements include nationality of the owners, number of shareholders, operation in specific industries, and more. However, if you need meet the criteria, forming an S corporation will probably be your best option.
Pick the Best of the Legal Structures for You
No one but you can tell you which of these legal structures will be best for your company. Think about how you want your company to operate (privately, or publicly), how many partners will be involved, and whether you’ll have any foreign investment. Once you have the answers to those questions, you can get started creating and registering your business.
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