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Chooosing The Right Legal Structure For Your Business

Updated on November 15, 2012

There are a number of considerations you will have to take into account when starting your new business. One of them is picking the right legal structure for that business. Whether you will be providing some sort of service or selling products, it’s crucial you choose the right structure for your business, understand this decision is of utmost importance, for it can affect how much you pay in taxes, handle investments in your business, your liability in the business and financial security.

If you are not sure or comfortable in making this decision yourself always consider legal and professional help. So what are the legal structures you’ll have to choose from, well this Article will tell you what they are and their descriptions.

Sole Proprietorship

This is the default legal structure unless you ask to be otherwise, a sole proprietor means that you are the boss; it means that one person is the owner and operator of the business, the owner is entitled to all the company profits. But on the other hand, the sole proprietor is also liable for the business losses and all the legal issues that may arise from operating of the business. The business owner under a sole proprietorship reports business income or losses on his/her personal tax returns, this is because the business is not taxed separately, the owner is essentially the business.

Partnerships

A partnership is an association between two or more people in operation of the business. In a partnership the partners are liable for debts of the business. Partnerships are usually sustained by an agreement. The agreement will contain terms that each partner will be responsible for and how profits are distributed in the business. The owners of partnerships similar to a sole proprietorship reports their business income or losses on their personal tax returns.

LLP

A limited liability partnership or LLP protects the individual partners from debts or liabilities. A limited liability partnership gives partners a voice in managing the business, but not share in its liabilities. The day to day operations in most cases will be done by the general partners.

LLC

The LLC has become a very popular business structure over the years due to their ease and flexibility. A Limited Liability Company is not taxed differently from a sole proprietorship, but provides limited protection of a corporation. The owners can use their losses to offset income; however this is up to the amount they invested in the company. Personal assets in an LLC have more protection than a sole proprietorship. On the other hand depending on your state an LLC can be subject to additional taxes, so do your research.

Corporation

When you decide to incorporate your company it will become a separate legal entity. A Corporation can own property, land and can also engage in lawsuits. If the corporation were to get sued, the personal assets of the owners are safe, as the corporation is a separate entity. A Corporation can be public, by selling stocks, or it can remain private and not sell stock to the general public. There are two types of distinctions in corporate taxation choices, C Corporation and an S Corporation. By default when you incorporate you will have a C Corporation tax status; however you can file for S corporation status at a later date.

What are the Differences between a C Corporation and an S Corporation?

S corporations receive the advantage of being taxed one time by the government. C corporations are taxed as corporate entities, their shareholders; including owners are taxed as well, so essentially with C corporation status you end up being taxed twice. S corporations may only have 75 owners, whereas C corporations are unlimited. S corporations may only issue one class of stock whereas C corporations can offer an unlimited class of stocks.


So remember before you start your business consider your many options when it comes to choosing a legal structure for your business. Making this decision requires a lot of research and possibly legal consultation so do not take this decision lightly, for it may have profound effects in how you operate your business, who you answer to, and where a big portion of your money ends up.

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