1. Sole Proprietorship
This is the most common form of
ownership. It requires the least paperwork, at least in the
beginning.
Many small businesspeople start out this
way, and form corporations or llc's later, as circumstances dictate.
That is a very valid approach.
For taxing purposes, a sole proprietor
fills out a Schedule C for his federal tax return detailing the income and
expenses of the company. Any profit that remains is taxed at a
personal tax rate; any loss is part of the deduction for the whole tax
return. For smaller companies, this is a very straightforward way of
doing it. It works best when there is a loss, or little profit.
Also, if a business owner wants more
legal insulation, it is often wise to look to other types of business
formation.
2. Partnership
A simple partnership is a like a sole proprietor
except now two or more people are involved. Each partner completely
responsible for liabilities of the partnership, and each partner's
personal assets are available to creditors of the business.
Husbands and wives often form business as
simple partners. Again, as long as the business is small, this is a
viable option. When it grows, or when a potential liability exists,
it is a good idea to look to other forms of business organization
There are many more complex partnerships
possible. Partnership agreements can be devised for nearly every
situation. The partnership agreement can specify who makes
decisions, and how profits are distributed. There is even a form of
partnership called a "limited liability partnership", which
places the general partner as the sole entity liable for any debt, and
places the general partners as simply investors.
3. C Corporation
A C Corporation is the most common entity
for public companies.
With a C corporation, the corporation
itself becomes a "person" and has its own tax rate, which is
often lower than individual tax rates. There is often more paperwork
involved with a C Corporation than with a sole proprietorship, such as
maintaining minutes and corporate documents. A corporation can be
owned by one person, or by thousands. Each owner receives a
specified number of shares.
If there is a sole owner of a
corporation, that owner will be expected to co-sign for all notes, debts
and liabilities. In large corporation, that isn't so.
4. Limited Liability Company (LLC)
The LLC is one of the fastest growing forms
of incorporation by small business, mostly due to its reduced
paperwork. An LLC may be owned by one person, or by
many.
By adding members to your LLC, you can get
the same profit-sharing characteristics of a partnership without being
personally liable for a partner's actions. As with other partnerships, the
operating agreement is very flexible in terms of specifying who makes
decisions, and how the profits are allocated.
Finding your perfect business organization is not
easy. There are a lot of tax considerations and liability
considerations. It is often well worthwhile to spend an hour or so
with an attorney to devise the best approach for your business.
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LLC Corporations
