Selecting a Business Structure
Each year, thousands of businesses are started in this country by entrepreneurs with visions of success. Unfortunately, as enthusiastic and determined as they are, many give little or no thought to the business structure that is best for them and their situation. This is a serious mistake since the type of business you select can introduce several important factors into your plans.
What follows is a brief description of the different types of business structure available as well as a short description of their advantages and disadvantages. For more help in determining which form of business is best for you, contact a lawyer or a tax adviser who specializes in small businesses.
A sole proprietorship is the most basic form of business. The owner of the business is solely responsible for the assets and liabilities of the company. The income of a sole proprietorship is taxed as an individual.
A partnership is two or more individuals being responsible for the business. Each partner is responsible for the obligations of the business to the extent determined by the agreement which formed the relationship. A partnership files its income information with the IRS and local taxation authorities, but payment of taxes is passed through to the partners on their individual tax returns.
A corporation is generally a larger and more complex business, although there are instances when individuals can incorporate in order to enjoy the tax advantages of such a business structure. There are also legal protections afforded to those who do business as a corporation.
Limited Liability Company
A limited liability company, or “LLC,” is a business structure that offers many of the business protections and taxation advantages of a corporation to the flexibility of an individual.
A cooperative is a business that allows member-owners to organize around a common need or to provide a service. Cooperatives are common in some industries such as healthcare, retail, agriculture, and art. Cooperatives do not pay taxes as an entity, although they must register with the IRS as well as local tax authorities. Income is distributed to member-owners who in turn pay their share of taxes on their personal tax returns.
An S Corporation is another form of business structure that allows individual owners to enjoy many of the benefits of corporations but be taxed as individuals. It is important to know that not all states offer S Corporations. Further, even among those that do, they are not taxed uniformly among states. An S Corporation has shareholders, but the corporation can have a separate life, apart from those shareholders. If, for example, a shareholder decides to sell his or her stock in the corporation, the business can continue relatively undisturbed.
It is important to understand that not all business structures are the same, and even between states business forms can differ. Anyone starting a business under any of these structures should consult with a small business attorney or tax specialist prior to making any decisions.
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Source: Small Business Administration (http://www.sba.gov)
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