When starting a new business, you need to decide which legal form is best for you and your business. Do you want to own the business yourself and operate as a sole proprietorship? Or do you want to share the shareholding, operate as a partnership or as a corporation? Before we discuss the pros and cons of these three types of property, let`s touch on some of the questions you`re likely to ask yourself when choosing the right legal form for your business. Disadvantages of companies: • The process of starting the business is stricter and more expensive. • Profits are subject to «double taxation», which means that profits are taxed at the company level and at the individual level when distributed to shareholders. • High level of governance and oversight by the Board of Directors. Although limited liability is similar to that of a corporation, the availability of flow taxation for members of an LLC is a feature of partnerships. The main difference between a partnership and an LLC is that an LLC separates the corporation`s business assets from the owners` personal assets and isolates the owners from the LLC`s debts and liabilities. Individual owners include professionals, service providers and retailers who are «in business for themselves.» Although a sole proprietorship is not a separate legal entity from its owner, it is a separate entity for accounting purposes. The financial activities of the business (e.g., receiving fees) are conducted separately from the person`s personal financial activities (e.g., paying for the house). Liability: LLC members are protected from personal liability for debts and business claims, a feature known as «limited liability.» If a limited liability company owes money or faces a lawsuit, only the assets of the company itself are threatened. Creditors cannot access the personal property of LLC members except in cases of fraud or illegality. LLC members should exercise caution so as not to «break the corporate veil,» which would expose members to personal liability. For example, LLC owners should not use a personal checking account for business purposes and should always use the LLC trade name (rather than the owner`s individual names) when working with clients.
Meanwhile, Jerry Greenfield (Ben & Jerry`s «Jerry») followed a similar path. He studied pre-medicine at Oberlin College in hopes of becoming a doctor one day. But he had to abandon that goal when he wasn`t accepted into medical school. On a positive note, however, his college education steered him into a more lucrative field: the world of ice cream making. He got his first glimpse into the ice cream industry when he worked as a shovel in Oberlin`s canteen. Fourteen years after their first meeting on the college track and field team, Ben and Jerry met again and decided to go ice cream. They moved to Burlington, Vermont — a college town that needed an ice cream shop — and took a $5 correspondence course from Penn State on how to make ice cream. After getting an A in the course – not surprising since the tests were open book – they took the plunge: with their savings of $8,000 and $4,000 in borrowed funds, they opened an ice cream shop at a converted gas station on a busy Burlington street corner.1 The next big decision was which form of business ownership was best for them.
This chapter introduces you to their options. The most common types of businesses include sole proprietorships, partnerships, limited liability companies, corporations and cooperatives. Here you will find more information about each type of legal structure. Incorporation: Corporations are more complex entities to create, have more legal and accounting requirements, and are more complex to operate than sole proprietorships, partnerships, or LLCs. One of the main disadvantages of a company is the high level of governance and oversight by the board of directors. Often, this prolongs decision-making when multiple shareholders or investors are involved. While there are many good reasons to choose a single-member LLC for your business, there are also drawbacks that you should be aware of. The first is cost. An LLC is subject to Crown incorporation fees as well as ongoing fees such as annual fees and franchise taxes.
All other assets held by the company, such as real estate, equipment and machinery, investments in the name of the institution and all assets manufactured but not sold, are also seized and liquidated. Tip: Important factors to consider before liability, tax structure and industry regulations. By creating a list of specific attributes about your company and its founders, you can choose the business structure that`s right for you. A major problem with partnerships as well as sole proprietorships is unlimited liability: in this case, each partner is not only personally responsible for his own actions, but also for the actions of all partners. If your partner in an architectural firm makes a mistake that causes a structure to collapse, the loss to your company will affect you as much as he does. And here`s the very bad news: if the company doesn`t have the cash or other assets to cover the losses, you can be sued personally for the amount owed. In other words, the party who suffered a loss due to the error can sue you for your personal property. Many people are understandably reluctant to enter into partnerships because they have unlimited liability. Some forms of business allow owners to limit their liability. These include limited partnerships and partnerships. An LLC has clear advantages in the areas of legal protection and liability. While there are filing fees for forming an LLC, these costs may be worth it compared to the thousands of dollars you could be responsible for as a sole proprietor.
Here is a short video that provides a simple and straightforward summary of the key points of each form of business ownership. No form of ownership will give you everything you desire. You have to compromise. Since each option has both advantages and disadvantages, it is up to you to decide which one offers the most important features for you. In the following sections, we compare three ownership options (sole proprietorship, partnership, corporation) in these eight dimensions. Taxation: A sole proprietorship has pass-through taxation. The company itself does not file a tax return. Instead, the income (or loss) is transmitted and reported on the owner`s personal tax return using a Schedule C (Form 1040). Overall, it is the flexibility of an LLP for a particular type of professional that makes it a superior option for an LLC or other business entity. As an LLC, the LLP itself is a flow-through entity for tax purposes.
This means that shareholders receive untaxed profits and have to pay taxes themselves. An LLC and LLP are preferable to a corporation that is taxed as a unit, and then its shareholders are taxed again on distributions. Subchapter S corporations are special private businesses (there are limits on the number of members) created to provide a tax benefit to small businesses when the requirements of the IRS code are met. Owners waive corporate income tax and are reported on their personal income tax returns, avoiding «double taxation» of ordinary businesses. The legislation allows business owners to form a limited partnership with two types of partners: a single general partner who manages the business and is responsible for its liabilities, and any number of limited partners who have a limited interest in the business and whose losses are limited to the amount of their investment. We have described the four most common corporate legal structures with considerations for each of the following, including taxes, liability, and formation of each.