Before you start your business, you need to decide what the legal structure will be. How you organize your business will affect your taxes, liability and other legal issues that have long-term implications. It is a good idea to consult a lawyer and tax advisor for advice about how you plan to structure your business.
The main forms of business ownership include:
- Sole Proprietorship—This is the simplest, least expensive business form and the one many people use if they want to be a one-person operation. It’s important to know that under a sole proprietorship, you’re personally liable for all debts incurred by the business.
- Partnership—When two or more people decide to join forces to form a business, they are creating a partnership. There are three general types of partnership arrangements:
– General partnership—In this arrangement, each partner is equally liable for debts incurred by the business, and they share profits and losses equally. While this spreads out the risk and the workload, it’s important to make sure everyone is clear about who is responsible for what part of the business and draw up a legal partnership agreement from the start.
– Joint venture—A partnership formed for a limited period of time or for a specific project.
– Limited partnership—Also known as a limited liability partnership, this structure allows partners to limit their personal liability and management responsibilities according to how much they have invested in the business.
- Limited Liability Company (LLC)—This business form has the tax advantages of a partnership or sole proprietorship (profits and losses can be reported on personal tax forms, for instance), combined with the protection from liability offered by a corporation.
- Corporation—Forming a corporation creates an independent entity that is separate from you or others in your company. Corporations sell ownership shares by issuing stock but its shareholders are not liable for the corporations’ debts or actions.
– C corporation—The standard corporation, which is taxed as a separate entity at corporate tax rates.
– S corporation—A corporation that has elected a special tax status whereby the corporation pays no income tax at the corporate level. Instead, income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns. There are a number of requirements for forming an S corporation, including a limit of 100 shareholders.
- Non-profit—A non-profit corporation is formed to provide a charitable service or further a public or private interest, rather than generate profits. Any income generated must be put back into the organization. To form a non-profit, you need to file papers of incorporation and file with the IRS for tax-exempt status, so that the organization will pay no taxes on income related to serving its mission.
(Source: Business.gov—An official site of the U.S. Small Business Administration.)
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