Introduction
If you’re starting a small business, you may be wondering what business structure would be best for your startup. The answer depends on your goals and needs. There are several different types of small businesses that can be formed in different ways, each with its own advantages and disadvantages. Below we’ll discuss some common types of legal structures used by commercial entities to help you decide which one might work best for your business model.
*The information provided on this website does not, and is not intended to, constitute legal advice. I am not an attorney, please seek legal counsel if needed.
Sole Proprietorship
A sole proprietorship is a business form in which one person owns and operates the business. The owner of a sole proprietorship is called its “proprietor.”
To register your business as a sole proprietorship, you must complete Form 1040-ES or Form 1065-B (depending on whether you’re filing taxes with the IRS). You may also need to complete an application for an Employer Identification Number (EIN) by calling 1-800-829-4933 or visiting https://www2.irs.gov/Businesses/SmallBusinesses/ApplyOnlineForEmploymentTaxes?subcmp_id=ENO_SS&func=detailSearch&sortBy=Type&pf_intl=1
Partnership
A partnership is a relationship between two or more people who share the liabilities and profits of their business. The partners are jointly liable for all the debts and obligations of the business, which means that if one partner defaults on payments, all other partners must pay it from their own funds.
Partnerships are typically used by small businesses because they allow for greater control over operations than sole proprietorships do—and they offer many tax benefits as well (such as partnerships being able to take advantage of pass-through taxation). However, partnerships also have some downsides: since there’s no single owner who can sell off stakes in order to raise capital easily; there’s little opportunity for growth without outside investment; and managing multiple investors can be tricky at times.
Limited Liability Company
A limited liability company (LLC) is a hybrid of corporation and partnership. LLCs provide limited liability for their members, but they do not have an actual “corporation” structure. Instead, the LLC has a separate legal personality that allows it to be taxed as a corporation or partnership depending on how you choose to organize your business.
The benefits of using an LLC include:
- Pass-through taxation (i.e., no double taxation)
- Flexible management structure
Corporation
A corporation is a form of business organization that allows you to have your own company, or company in name only.
You can incorporate in your state and register with the IRS as either a C-corporation or S-corporation. A C-corporation is owned by shareholders who elect officers and manage the business on behalf of all owners; however, it does not pay federal income tax (but does pay self-employment taxes). The main advantages of incorporating are:
- You can protect yourself financially by limiting liability on lawsuits against the company if something goes wrong with it; this is called limited liability.
- You will be able to offer stock shares to investors who may want to invest money into your business but are afraid they’ll lose some if sued by creditors; this could help raise capital quickly without having to wait until banks approve loans
What is the Best Type of Legal Structures for your Business
The best type of legal structure for your business depends on a number of factors, including the size and scope of your company, as well as its location.
- Sole Proprietorship: A sole proprietorship is an unincorporated business owned by one person. If you’re starting a small business without employees or partners, this is probably the best choice for you because it’s simple and doesn’t require any outside investment or funding from anyone else.* Partnership: Partnerships are formed between two or more people who share the profits from their work together. Partnerships can operate with varying levels of financial transparency; some are completely open while others have limited reporting requirements.* Limited Liability Company (LLC): An LLC is similar to partnerships but offers much greater protection against loss than other types of businesses because it limits how much liability each member takes upon themselves when things go wrong within their organization.* Corporation: Corporations provide significant tax benefits over other forms companies do not offer such as being able to issue stocks which gives shareholders rights over earnings made by corporations through dividends paid out annually based upon shareholder equity holdings acquired during buyback periods after initial purchase prices were paid off completely*
Conclusion
I hope this article has helped you to understand the different types of legal structures available to business owners at various stages in their growth. If you have any questions or comments, please feel free to contact me via email or by phone at 888-963-4748.
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