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Article #10: Choosing your legal structure

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Your choice of whether your business even worse for partnerships. As a
should be a proprietorship, a partnership partner, you are responsible not only for
or a corporation can be important for your own business debts, but for those of
many reasons. Each has advantages and your partners as well. Should they incur
disadvantages depending on the type of debts or legal judgments against the
activity you are engaged in. business, you could be held legally
Part of keeping your home-based business responsible for them. Disputes among
legal involves choosing the legal partners can be a problem, too.
structure for it: sole proprietorship, Unless you and your partners see eye to
partnership, or corporation. Aside from eye on how the business should be run and
being necessary for government reporting what it should accomplish, you are in for
and tax purposes, this can enable your trouble.
business to operate more efficiently. However, a partnership is generally the
Since each legal form has its own unique least advisable way to go. It requires
characteristics, your goal is to choose filing a separate partnership tax return,
the form that works best for you. does not carry liability protection for
Sole Proprietorship A business owned by general partners, and can lead into legal
one person, who is entitled to all of its and personal disputes. A corporate form
profits and responsible for all of its of ownership is generally recognized as
debts, is considered a sole preferable over partnership, because it
proprietorship. This legal form is the can serve the same purpose while offering
simplest, providing maximum control and a cleaner and better protected structure
minimum government interference. for the owners.
Currently used by more than 75 percent of Corporation A corporation differs from
all businesses, it is often the suggested the other legal forms of business in that
way for a new business that does not the law regards it as an artificial being
carry great personal liability threats. possessing the same rights and
The owner simply needs to secure the responsibilities as a person. This means
necessary licenses, tax identification that, unlike sole proprietorships or
numbers, and certifications in his or her partnerships, it has an existence
name, and you are now in business! The separate from its owners. It has all the
main advantages that differentiate the legal rights of an individual in regards
sole proprietorship from the other legal to conducting commercial activity -- it
forms are (1) the ease with which it can can sue, be sued, own property, sell
be started, (2) the owner's freedom to property, and sell the rights of
make decisions, and (3) the distribution ownership in the form of exchanging stock
of profits (owner takes all). for money.
Still, the sole proprietorship is not As a result, the corporation offers some
without disadvantages, the most serious unique advantages. These include (1)
of which is its unlimited liability. As a limited liability: owners are not
sole proprietor, you are responsible for personally responsible for the debts of
all business debts. Should these exceed the business, (2) the ability to raise
the assets of your business, your capital by selling shares of stock, and
creditors can claim your personal (3) easy transfer of ownership from one
assets--home, automobile, savings individual to another. Plus, unlike the
account, and investments. Sole sole proprietorship and partnership, the
proprietorships also tend to have more corporation has "unlimited life" and thus
difficulty obtaining capital and holding the potential to outlive its original
on to key employees. This stems from the owners.
fact that sole proprietorships generally The main disadvantage of the corporate
have fewer resources and offer less form can be summed up in two words:
opportunity for job advancement. Thus, taxation and complexity. In what amounts
anyone who chooses the sole to double taxation, you must pay taxes on
proprietorship should be prepared to be a both the income the corporation earns and
generalist, performing a variety of the income you earn as an individual.
functions, from accounting to Along with this, corporations are
advertising. required to pay an annual tax on all
Partnership A business owned by two or outstanding shares of stock. Given its
more people, who agree to share in its complexity, a corporation is both more
profits, is considered a partnership. difficult and more expensive to start
Like the sole proprietorship, it is easy than are the sole proprietorship and the
to start and the red tape involved is partnership. In order to form a
usually minimal. corporation, you must be granted a
The tax structure is the same as charter by the state in which your
proprietorship except in the profits and home-based business is located. For a
losses of the partnership are divided by small business the cost of incorporating
an agreed percentage by the partners. usually ranges from $500 to $1,500. This
The main advantages of the partnership includes the costs for legal assistance
form are that the business can (1) draw in drawing up your charter, state
on the skills and abilities of each incorporation fees, and the purchase of
partner, (2) offer employees the record books and stock certificates. And,
opportunity to become partners, and (3) since corporations are subject to closer
utilize the partners' combined financial regulation by the government, the owners
resources. must bear the ongoing cost of preparing
However, for your own protection, it is and filing state and federal reports.
advisable to have a written partnership S Corporation If you are interested in
agreement that will spell out the forming a corporation, but hesitate to do
specifics of the agreement. This should so because of the double taxation, there
state (1) each partner's rights and is a way to avoid it. You can do this by
responsibilities, (2) the amount of making your business an S corporation.
capital each partner is investing in the The Internal Revenue Service permits this
business, (3) the distribution of type of corporation to be taxed as a
profits, (4) what happens if a partner partnership rather than a corporation.
joins or leaves the business, and (5) how However, in order to qualify for S
the assets are to be divided if the status, your business must meet the
business is discontinued. Things have a specific requirements set forth by the
way of changing and people forgetting IRS. These include limits on (1) the
over time, so it is essential that there number and type of shareholders in the
be a signed document that all abide by. business, (2) the stock that is issued,
Partnerships also have their share of (3) the corporation's sources of
disadvantages. The unlimited liability revenues.
that applies to sole proprietorships is






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