Starting a business always requires the understanding of laws on the local, provincial and federal level. Out of all the decisions you take when kick-starting your business, the most vital is the type of legal structure you choose. This decision ripples into numerous effects on the business. Mostly, the structure you adopt ought to be in alignment with the organization’s strategic objectives relating to taxes, limitation of liability, ownership dilution, and capital acquisition.
The process of registration for a legal structure can be tough on you and your business. Sound counsel from business experts and legal advisors can really help you through the process and inform you about the haves and have-nots of various business entities. Owners often hesitate to spend a few thousand bucks on expert advice and regret their decisions later. Due to the varying nature of tax schemes related to businesses, choose the legal structure that thoroughly matches your business’s needs. Below I have provided some legal structures to make it easier for you to decide.
It is the most common and simplest structure involving just one owner looking after the business. If you are a one-man team spearheading your startup, this might be the way to go.
o In terms of tax, sole proprietorship officially has to share the profit and loss from the business as part of the owner’s wealth statement. You can go through the IRS Sole Proprietorship page and determine you tax type and rate.
o Fortunately, sole proprietorships enjoy concessions in the submission of tax estimations, unlike other legal entities. You also have full control over your business that leaves you with all the decision making.
o Unlimited Liability – The owner is responsible for the liabilities of the business.
o Banks and Lending Institutions often hesitate to make business loans to sole proprietors. Only sources you can finance yourself with can be savings or family loans.
Structuring a partnership requires two or more partners owning and operating the business. There are general partnerships and limited partnerships. Individuals in a general partnership have unlimited liability leaving all partners liable for debt taken in the business by any of the partners. In a limited partnership, at least one general partner is liable to the company’s liabilities. The limited partners have limited liability subject to their involvement in the business. To understand the application process, follow the link.
o Having two or more partners actively owning and operating the business can easily form a partnership.
o Partnerships don’t pay any income on their profits – all the profits and losses pass on to the individual partners.
o Unlimited Liability – partners are personally liable for the debts of the partnership.
o Unlike Sole Proprietorship, setting up a Partnership is a bit costlier in terms of legal services.
Limited Liability Companies
An LLC is similar in structure to that of a partnership but each partner has limited liability. It allows partners to take advantage of the benefits accrued from being a corporation and a partnership. It is also sometimes called a hybrid form of partnership. In order to know how to get LLC registered, understand the requirements of the federal and local company registration laws and then proceed with the application.
o Profits and losses are passed on to the owners without taxation on the business income itself.
o Business owners are shielded from personal liability.
o If you are registered in a different state and operating in a different state altogether, you cannot enjoy any limited liability in the event of protection from creditors in the state you are operating.
It is a type of corporation that is certainly treated by the IRS as a partnership for tax purposes. These corporations are not liable to pay corporation tax but the profits and losses of the corporation are trickled down to the stockholders. In order to create an S corporation, you will need a panel of 35 or fewer stockholders. Spouse(s) in any case will be considered a single stockholder. The corporation can only have one type of stock to be issued and outstanding. There can be differences in voting rights but the stocks belong to the same type.
o Tax saving subject to lower tax rates.
o The corporation doesn’t need to maintain high retained reserves which means the profits can be distributed to stockholders as dividends.
o The taxable income of the corporation is taxed to the stockholders even if it is not actually distributed to them.
o If your business has got irregular cash flows, this type of entity may not be the wisest choice.