Are you a business entrepreneur who has recently started a new venture of your own? Irrespective of when you’ve started your business, you should decide whether or not it is going to be a corporation, partnership, or a limited liability company or an LLC. Now that you know about 3-4 types of business entities, you must be wondering which one will be the most suitable for you. Which of the form will be the best depending on the kind of business you run? How many owners does your business have? Not one choice will ever suit all businesses and hence the owners have to choose the structure as per their needs.
Few of the most important factors that you should consider are:
- The possible liabilities and risks of the business
- The costs and formalities which are involved in maintaining different business structures
- Investment needs
- Situations of income taxes
LIABILITIES AND RISKS
If you consider the bigger picture, the most appropriate ownership type for your business will depend on the kind of products and services it offers. In case your business gets engaged in various risky activities like repairing roofs or stock trading, you should certainly opt for an entity which offers personal liability protection and safeguards the assets from business claims and debts. A limited liability company (LLC) or a corporation is the best choice for a business owner.
COSTS AND FORMALITIES
Partnerships and sole proprietorships are easier when it comes to setting up and you don’t require filing any special forms or require paying any fees to start off the business. Corporations and LLCs are more expensive to form and also tough to maintain. If you wish to form an LLC or a corporation, you require filing a document with the state and also pay a fee, depending on the state where you are planning to run your business. On the other hand, if you’re on a shoestring budget, go for a sole proprietorship.
The owners of partnerships, sole proprietorships and LLCs pay taxes on the profits they earn on their business in a similar way. The aforementioned business types are pass-through entities which imply that all profits and losses pass to the owners through the business. Hence, partners, sole proprietors and LLC owners can rely on the same level of complexity, costs and paperwork.
The corporate structure usually permits a business to sell shares through offerings of stocks and this lures the investment capital and retains the best employees by issuing employee stock options. Businesses which don’t have the option of issuing stocks can never go public. If you want a limited liability, the LLC offers same protection as corporation.
The initial choice that you make regarding a business structure is not set in stone. You can begin as a partnership or a sole proprietorship and then convert your business later into an S-corp or an LLC.