Business Startups
If you are starting a new business operation, one of the first areas to address is to decide what kind of legal entity should be established to own and operate the business. There are basically four different kinds of organizations that state and federal government recognize:
* Sole proprietorship
* Partnerships
* Corporations ( C & Sub-S)
* Limited Liability Companies
A primary question for any startup business is whether to establish a legal entity, typically a corporation or a limited liability company or operate as a sole proprietor or a partnership if more than one individual is involved. The obvious advantage of a legal entity is that it can limit the liability of the owners to the amount of capital invested.
Without a legal entity an individual business owner's operation is a sole proprietorship or when two or more people establish a business without a legal entity have formed a general partnership.
There are often good reasons to start a small business not as a legal entity. Some of the risks can be covered by insurance. Often the owners may be required to sign personal guaranties when dealing with landlords and with banks granting loans. This defeats the limited liability protection with regard to those that provide the guarantees, however on the other hand, the entity will protect the business against customers, suppliers and others and most every other obligation where a personal guarantee was not provided.
Sole Proprietorship:
This type is based on personal ownership. Property and liabilities are owned by and the responsibility of the individual owner. A husband and wife can operate as “Sole Proprietorship) Home businesses often use this type. It is simple and cheap. Business taxes are filed as personal income. Liability is also personal, which is seen as the greatest disadvantage of this type of business operation.. In most areas, starting a sole proprietorship is as easy as filing a DBA (Doing Business As). Some locations (and types of businesses) may require other licensing. Fees are minimal. No record keeping is required by law, except booking for tax purposes.
Partnership:
Consists of two or more parties owning an interest in the business entity. The primary document is the partnership agreement, that describes the division of ownership and profits or losses. In a Partnership, the responsibilities are shared by the partners, each partner can bind the partnership in dealing with a third party. Management duties and profits are shared as well. There are no direct taxes on a partnership; taxes are handled as personal taxes on each partner. The liabilities of the business are the obligations of the owners, usually in direct proportion to the ownership. There are special types of partnerships that will limit the liability of some of the owners under certain circumstances, such as, Limited Partnerships.
Corporations
C Corporations This is a more complex legal structure. A corporation is a legal entity separate from its owners. Ownership is through stock in the company. Stock may be privately held or it may be sold to the general public. The ability to offer stock for sale allows for financing other than borrowing it. Another primary advantage is the protection a corporation offers by limiting liability of the stock holders to the amount of their investment. There are more formalities and regulation issues with corporations. The profits of the corporation are distributed to the owners through stock dividends which are taxed to the corporation and then taxed to the owners personally.
Sub-Chapter S Corporations This type of corporation has certain tax advantages over a C Corp. Profits and losses for taxes purposes are treated like they are for partnerships, if certain IRS requirements are met, but all other aspects of corporations are the same as the C Corporation the S Corp taxing method is a benefit. Other advantages of a C Corp are retained.
Limited Liability Company This form is a hybrid of a partnership and a corporation. The main benefit is, the limited liability of the owners, the same as corporations. The profits and losses are taxed as personal income, the same as a partnership or sole proprietorship, however there are no restriction regarding stock ownership to receive this tax advantage as there is with the Sub Chapter S corporation.
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If you are starting a new business operation, one of the first areas to address is to decide what kind of legal entity should be established to own and operate the business. There are basically four different kinds of organizations that state and federal government recognize:
* Sole proprietorship
* Partnerships
* Corporations ( C & Sub-S)
* Limited Liability Companies
- Limited Liability Companies
A primary question for any startup business is whether to establish a legal entity, typically a corporation or a limited liability company or operate as a sole proprietor or a partnership if more than one individual is involved. The obvious advantage of a legal entity is that it can limit the liability of the owners to the amount of capital invested.
Without a legal entity an individual business owner's operation is a sole proprietorship or when two or more people establish a business without a legal entity have formed a general partnership.
There are often good reasons to start a small business not as a legal entity. Some of the risks can be covered by insurance. Often the owners may be required to sign personal guaranties when dealing with landlords and with banks granting loans. This defeats the limited liability protection with regard to those that provide the guarantees, however on the other hand, the entity will protect the business against customers, suppliers and others and most every other obligation where a personal guarantee was not provided.
Sole Proprietorship:
This type is based on personal ownership. Property and liabilities are owned by and the responsibility of the individual owner. A husband and wife can operate as “Sole Proprietorship) Home businesses often use this type. It is simple and cheap. Business taxes are filed as personal income. Liability is also personal, which is seen as the greatest disadvantage of this type of business operation.. In most areas, starting a sole proprietorship is as easy as filing a DBA (Doing Business As). Some locations (and types of businesses) may require other licensing. Fees are minimal. No record keeping is required by law, except booking for tax purposes.
Partnership:
Consists of two or more parties owning an interest in the business entity. The primary document is the partnership agreement, that describes the division of ownership and profits or losses. In a Partnership, the responsibilities are shared by the partners, each partner can bind the partnership in dealing with a third party. Management duties and profits are shared as well. There are no direct taxes on a partnership; taxes are handled as personal taxes on each partner. The liabilities of the business are the obligations of the owners, usually in direct proportion to the ownership. There are special types of partnerships that will limit the liability of some of the owners under certain circumstances, such as, Limited Partnerships.
Corporations
C Corporations This is a more complex legal structure. A corporation is a legal entity separate from its owners. Ownership is through stock in the company. Stock may be privately held or it may be sold to the general public. The ability to offer stock for sale allows for financing other than borrowing it. Another primary advantage is the protection a corporation offers by limiting liability of the stock holders to the amount of their investment. There are more formalities and regulation issues with corporations. The profits of the corporation are distributed to the owners through stock dividends which are taxed to the corporation and then taxed to the owners personally.
Sub-Chapter S Corporations This type of corporation has certain tax advantages over a C Corp. Profits and losses for taxes purposes are treated like they are for partnerships, if certain IRS requirements are met, but all other aspects of corporations are the same as the C Corporation the S Corp taxing method is a benefit. Other advantages of a C Corp are retained.
Limited Liability Company This form is a hybrid of a partnership and a corporation. The main benefit is, the limited liability of the owners, the same as corporations. The profits and losses are taxed as personal income, the same as a partnership or sole proprietorship, however there are no restriction regarding stock ownership to receive this tax advantage as there is with the Sub Chapter S corporation.
Bottom of Form