Probably, the most important decision you make when starting your own business is to choose the type of legal structure you'll use for your enterprise. Furthermore, it is also important when we talk about computing your taxes.
Aside from the fact that this decision has a huge influence on your tax payments, your business structure will also affect the amount of paperwork your business has to do, your ability to earn profit and the personal liability you face.
You should choose the structure that most closely matches your company's needs and you have to make your choice wisely because each business form comes with different tax consequences.
Below are the 3 basic business structures:
Sole Proprietorship
The simplest structure which only involves just one individual who owns, at the same time operates the entire business is sole proprietorship. For those who want to have business alone, this structure can be good for you.
This status automatically comes as long as you are the sole owner of your enterprise. You do not have to take any formal action to form a sole proprietorship.
Why is sole proprietorship advantageous?
1. Easy and less costly to form - with this type of business structure, costs is minimal, with legal costs limited to obtaining the needed permits and license.
2. Total Control - you don't have to consult with anyone else when you need to make decisions or changes. Thus, you have complete control over your business decisions because you are the sole owner.
- Easy Tax Preparation - because there is no legal separation between you and your business, your tax reporting requirements are easy to fulfil. With sole proprietorship, you can get the lowest tax rate of all the business structures.
What are its disadvantages?
* Unlimited personal liability - you can be personally liable for the liabilities and obligations of your company because there is no legal separation between you and your business.
2. Difficulty in raising capital - banks and other lending institution are hesitant to lend to a sole proprietor because they are perceived to have lack of credibility when it comes to repayment of the business fails.
Partnership
This structure is a type of business where there are two or more people who share ownership, liabilities and management.
Types of Partnerships
* General Partnerships - partners equally shares the profits, liability and management duties. If there's no equal distribution, the percentages assigned to every partner must be documented in the partnership agreement.
* Limited Partnerships - they more complex than general partnership because they allow partners to have limited liability as well as limited input. These limits will depend upon each partner's investment percentage.
* Joint ventures - partners act as general partners for a limited period of time or for a single project. They can be recognised as ongoing partners if their venture continues but they must file as such.
3. Joint ventures - for a limited period of time or for a single project, partners act as general partners. They can be recognised as ongoing partners if their venture continues but they must file as such.
Advantages of Corporations:
As a shareholder, your personal assets are protected from the corporation's debts and actions. Plus, corporations file taxes separately from their owners. The owners only pay taxes on corporate profits paid to them in the form of dividends and bonuses. Any additional profits are awarded a corporate tax rate, which usually lower than a personal income tax rate.
Corporations file taxes separately from their owners. Thus, the owners only pay taxes on corporate profits paid to them in the form of dividends and bonuses. Moreover, shareholders' personal assets are protected from the corporation's debts and actions. Any additional profits are awarded a corporate tax rate, which is commonly lower than a personal income tax rate.
Disadvantages of Corporations:
A corporation is an independent entity owned by stakeholders because t is separate from its owners so it requires complying with more regulations and tax requirements. These make this structure more expensive and complex than most of other business structures.
A corporation is formed under the laws of the state in which it is registered and you will probably need an assistance of an attorney to guide you when starting a corporation. Furthermore, there are increased paperwork and recordkeeping burdens associated with this business structure.
Aside from the fact that this decision has a huge influence on your tax payments, your business structure will also affect the amount of paperwork your business has to do, your ability to earn profit and the personal liability you face.
You should choose the structure that most closely matches your company's needs and you have to make your choice wisely because each business form comes with different tax consequences.
Below are the 3 basic business structures:
Sole Proprietorship
The simplest structure which only involves just one individual who owns, at the same time operates the entire business is sole proprietorship. For those who want to have business alone, this structure can be good for you.
This status automatically comes as long as you are the sole owner of your enterprise. You do not have to take any formal action to form a sole proprietorship.
Why is sole proprietorship advantageous?
1. Easy and less costly to form - with this type of business structure, costs is minimal, with legal costs limited to obtaining the needed permits and license.
2. Total Control - you don't have to consult with anyone else when you need to make decisions or changes. Thus, you have complete control over your business decisions because you are the sole owner.
- Easy Tax Preparation - because there is no legal separation between you and your business, your tax reporting requirements are easy to fulfil. With sole proprietorship, you can get the lowest tax rate of all the business structures.
What are its disadvantages?
* Unlimited personal liability - you can be personally liable for the liabilities and obligations of your company because there is no legal separation between you and your business.
2. Difficulty in raising capital - banks and other lending institution are hesitant to lend to a sole proprietor because they are perceived to have lack of credibility when it comes to repayment of the business fails.
Partnership
This structure is a type of business where there are two or more people who share ownership, liabilities and management.
Types of Partnerships
* General Partnerships - partners equally shares the profits, liability and management duties. If there's no equal distribution, the percentages assigned to every partner must be documented in the partnership agreement.
* Limited Partnerships - they more complex than general partnership because they allow partners to have limited liability as well as limited input. These limits will depend upon each partner's investment percentage.
* Joint ventures - partners act as general partners for a limited period of time or for a single project. They can be recognised as ongoing partners if their venture continues but they must file as such.
3. Joint ventures - for a limited period of time or for a single project, partners act as general partners. They can be recognised as ongoing partners if their venture continues but they must file as such.
Advantages of Corporations:
As a shareholder, your personal assets are protected from the corporation's debts and actions. Plus, corporations file taxes separately from their owners. The owners only pay taxes on corporate profits paid to them in the form of dividends and bonuses. Any additional profits are awarded a corporate tax rate, which usually lower than a personal income tax rate.
Corporations file taxes separately from their owners. Thus, the owners only pay taxes on corporate profits paid to them in the form of dividends and bonuses. Moreover, shareholders' personal assets are protected from the corporation's debts and actions. Any additional profits are awarded a corporate tax rate, which is commonly lower than a personal income tax rate.
Disadvantages of Corporations:
A corporation is an independent entity owned by stakeholders because t is separate from its owners so it requires complying with more regulations and tax requirements. These make this structure more expensive and complex than most of other business structures.
A corporation is formed under the laws of the state in which it is registered and you will probably need an assistance of an attorney to guide you when starting a corporation. Furthermore, there are increased paperwork and recordkeeping burdens associated with this business structure.
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The way you select your business structure should be according to your business's nature and size. Want to learn more about this topic? Visit the link above.
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