Every small business owner faces the question: which form of organization is best for their company? This can be a difficult decision. There are several choices, and each has its own advantages as well as disadvantages. An attorney can often give solid advice about this type of decision. The following is a general overview of four types of business organization.
One popular form of organization is the Limited Liability Company (LLC), which is a business entity that offers limited liability protection. For tax purposes, the LLC allows for pass-through taxation; income is not taxed at the entity level but is passed through onto the owners, called “members.” The members must report income or loss on their personal tax returns, but the LLC exists as a legally separate entity from the owners. Therefore, members are not personally held responsible for LLC debts or liabilities. LLCs have no ownership restrictions, and members have flexibility in structuring management. LLCs are also beneficial in that they do not require as much paperwork or formality as corporations do.
A sole proprietorship is obviously owned and operated by a single person. This business entity is the simplest, cheapest, and easiest to create. Thus, this is an appealing form of business organization for a lot of small business owners. The only steps involved are registering a business name and acquiring the appropriate zoning and licenses. The difficulty is that the business owner is seen as joined with the entity. The life of the business is tied to the life of the owner. The sole proprietor is responsible for all aspects of the business, and is the owner of the business assets. This means the owner must claim business revenue and expenses on his or her personal income tax return and depending on income level, tax rates may be higher for a sole proprietor compares to a corporation. Worst of all, the sole proprietor is personally responsible for all business debts. If bills are not getting paid, your personal assets could be seized.
Partnerships are agreements between two or more people to operate as co-owners of a business. Partnerships are simpler and less expensive than corporations to form; but don’t be fooled, they can get quite complex. An attorney should draw up the agreement outlining partner rights and responsibilities. Each partner should be responsible for all aspects of running the business and can be held accountable for the actions and decisions of the other partner(s). All partners are personally liable for all business debts as well as any wrongful actions on the part of any of the other partners in the course of the business. A partnership business name must be registered, and if one of the partners leaves, for whatever reason, the partnership must be dissolved and reconstituted.
A corporation is an business entity form that is very common with bigger businesses. Corporations are more expensive to start up, and more complex to operate, but a corporation is a legally separate entity from the shareholders. This means that shareholders are only liable to the extent of their investment and thus there is less financial risk. Also, shareholders elect directors who elect executives who are then responsible for running the corporation. In a small business there need be only one shareholder and one director, so small operations are possible.
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