An important part of your business plan is the actual structure you will use. Choosing a business structure is very important for two important reasons. Number 1: tax implications & Number 2: personal property.
Don’t be fooled, you had better know the differences, as well as the impacts each one can and might have on you.
- The business is owned and operated by you. There are no partners or board of directors.
- It is the least expensive to set up. You alone reap the benefits, and losses.
- It requires the least amount of paperwork on your part.
- You have the ability to move funds in and out of accounts.
Sounds great, doesn’t it? It is, but it is important to know and understand the risks that come with sole proprietorship.
- Just like you reap all the benefits, you are also responsible for ALL of the debt.
This responsibility extends to your personal funds.
- You do not qualify for tax benefits as corporations do.
- It is more difficult to secure a loan.
- It is between two or more people, therefore you share the responsibilities.
- Each party shares in losses and profits.
- Partners share in contributing money, labor and/or property.
- Less expensive to start, and they do not pay minimum taxes that larger corporations
are subject to.
- Your partner’s decisions are your responsibility.
- Unorganized partnerships easily lead to disputes among owners.
- Two or more ways to split the profits.
The Limited Liability Company (LLC)
- Personal liability protection for owners.
- Pass through taxation.
- No annual meetings.
- Costlier than others, and due to the lack of laws, there are more fee’s involved.
- There are no specific or defined roles for members.
- There is a limited life, if a member leaves the business, the business can no longer operate.
- Legally, a corporation is separate entity from its owners and shareholders.
- If an owner leaves, the corporation still exists.
- Taxes can be passed through.
- Funds can be raised by selling shares.
- The start-ups fees can be expensive.
- There is much more paperwork to file compared to other business structures.
- Taxes are more involved, and they are filed through the corporation.
- Annual meetings are required and must be recorded.
Corporations are broken into S and C corporations. They are similar, but there are differences when it comes to ownership, shareholder rights, and taxation. Check with an accountant to be certain on which scenario fits your needs the best. More information about the differences can be found here.