There are different forms of business structures. The right choice of the legal structure of the company will benefit the owners while choosing the wrong form of business will make it hard to make any profits. One must consider legal and tax consideration when starting a business and selecting the structure of the company.
Today businessmen can choose among many different types of business structures, and this decision will have a great influence on the way they run their businesses. The first and the most important one is that the chosen business structure will have a direct impact on how much money will the owners pay in taxes. Also, this decision will determine the ways a company can raise funds, the personal responsibility and liability of the business owners, the amount of paperwork to be done, etc.
Businessmen can choose any common business structure, such as a sole proprietorship, a limited liability company, a corporation and a partnership. Also, today there is a special type of business structure, which is called an S Corporation. Each form of business has its advantages and disadvantages. Thus, it is of the greatest importance for the business owners to be very careful when selecting the form of the business they are going to run.
The most common business structure is a sole proprietorship. It is the simplest business form of business and it requires the least amount of funds to establish the company. Also, tax rates are the lowest and the process of the tax preparation is rather easy, as business is not taxed separately. Such companies are owned and run by the same persons who have a complete control over all business decisions. However, there is a significant disadvantage of the sole proprietorship business structure, which is the unlimited personal liability for the owners, who become responsible for all company’s debts.
A corporation is a company owned by its shareholders. Thus, the shareholders are not legally liable for any losses or obligations of the corporation. Corporations can easy raise money by selling stocks. However, this business structure has a complex system of taxation, and it can be taxed even twice (when making profits and when paying dividends to its shareholders). Also, corporations require much money to start and operate, and this business structure is highly regulated by federal and state agencies.
The next common form of business structure is a partnership. It has much in common with a sole proprietorship, but it is owned by two or more people. These owners have equal rights and responsibilities when sharing the profits and covering the losses of the company. However, one of the main disadvantages of the partnership business form is that the partners may disagree how to run a business, and no profits can be made if the partners cannot make the compromises.
A limited liability company (LLC) is a business structure that combines the limited liability of the owners (members) of the LLC and the flexibility to divide the profits among the members regardless of ownership. However, if one member decides to leave the company, the LLC has to be closed. Also, this form of a business company cannot issue stocks and cannot raise funds as the corporations do.
An S corporation is a new type of corporation, which is specially created by the IRS tax election. There are many advantages this business structure has: some expenses are written off as business expenses, S corporation’s profits are taxed at a lower rate, etc. At the same time, these corporations must have scheduled meetings of its directors and shareholders, the process of maintaining records is rather complicated, and S corporations are obliged to pay reasonable compensations to their shareholders.
Every business structure has its pros and cons and choosing the best business structure will depend on the goals of people who are going to start a business. All people have different goals and ambitions. If you want to run a local shop, the sole proprietorship will be the perfect choice. However, if the owner wants to expand the business and make higher profits, he may want to raise more funds by incorporating the business.
Carter, C. (n.d.). Advantages and Disadvantages of Different Business Structures. Houston Chronicle. Retrieved from http://smallbusiness.chron.com/advantages-disadvantages-different-business-structures-21149.html
IRS (Internal Revenue Service). (n.d.). Business Structures. Retrieved from http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Business-Structures
U.S. Small Business Administration. (n.d.). Choose Your Business Structure. Retrieved from http://www.sba.gov/category/navigation-structure/starting-managing-business/starting-business/choose-your-business-stru