Would you like to start a new business? If you plan to open one in the United States, you’ll need to select between 4 different types of business structures. Each is distinct from a taxation and legal standpoint, so you should be careful to choose the option that works best for you.
1. Sole Proprietorship: Sole proprietorships are the most popular form of business in the US, according to the Internal Revenue Service (IRS). In this business structure, the owner or proprietor has full control of the company and its operations. Most often, these types of businesses are small. Many are home-based or are single location businesses, consulting firms, or retail shops.
Under this format, business owners must keep track of their own records and provide self-employment taxes to the IRS.
Why Choose a Sole Proprietorship Structure: This structure is easy to set up. You do not need to submit any legal filings to start your business. If you’re your only employee and do not plan to grow, this could be a great option for you. Keep in mind, however, that legal protections for this structure are limited.
2. Corporation: If you decide to go with a corporation structure, your business will be a legally separate entity with many of the same rights as individual persons. Shareholders (i.e. partial owners) in a corporation are not liable if a company is sued or goes under.
Why Choose a Corporation: Many companies choose the corporation structure for its excellent legal protection and benefits. Consider if these pros are worth it for you and your company.
3. Partnership: In a partnership, two or more co-owners form a legal agreement to run the company. Each partner invests in the business and is privy to the losses and gains of the organization.
Why Choose a Partnership: If you wish to share the risks and rewards equally with your co-owners, a partnership may be a good option for you. This structure also has the advantage of being relatively easy to set up. Keep in mind though, that your private assets are at risk if you select a partnership.
4. Limited Liability Corporation (LLC): This company structure offers more protection to business owners. If an LLC is sued or files for bankruptcy for example, the owners’ personal finances are not up for grabs. In spite of this, the taxation for LLCs is similar to that found in a sole proprietorship.
Why Choose an LLC Structure: The fees and paperwork required for this structure are often substantial, but many businesses find it’s worth it for the legal coverage. Remember, when setting up an LLC, it is important that you write up an operating agreement. This is absolutely essential for LLCs with more than one owner to resolve disputes
It’s hugely important to deeply research each business structure prior to starting your company. Take the time to choose your ideal option with all the flexibility and legal protection you need.
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