There are a variety of different business structures and the way that a business is structured will have an impact on the nature of the business itself, the target market, and the service or product being offered. It is important that each of these factors are considered when planning your business and choosing a structure.
Sole proprietorship is a term used for a person who establishes a business themselves with the goal of making a profit. There are advantages and disadvantages of being a sole proprietorship with one advantage being that there is not a statutory requirement that forces you to keep your accounts in a particular form. A big disadvantage of being a sole proprietorship is that you assume personal liability for all business debts. As a sole proprietor you have total control of your business, can offset tax allowances against income tax, and can avoid double taxation. On the other hand, it can be difficult to raise investment funds and you are liable for debts. A sole proprietorship business is, however, easy to set up.
A partnership is formed when you enter into business with another person or persons. There are no formalities required when creating a partnership but it is a good idea to create a written contract. A partnership is created when two or more people own a business and share in the profits and there is no limitation of liability on any partners. Partnerships are normally taxed in the same way as sole proprietorships.
Limited Liability Company (LLC)
A limited liability company is a type of business structure that provides the tax efficiencies of a partnership and the limited liability of a corporation. The owners of an LLC are referred to as members and while laws vary by state, the members can consist of individuals, other LLCs, or corporations. There are slight differences depending on which state you are in when it comes to forming a limited liability company. To create an LLC, you must choose a business name, file articles of organization, obtain permits and licenses, hire employees, create an operating agreement, and announce your business.
A corporation is an independent business owned by shareholders and the corporation itself, not the shareholders, is legally liable for debts. Corporations are more complex business structures that normally have complex legal and tax requirements and high administrative fees. Corporations are normally only suggested for large, established companies with multiple employees.
An S corporation is a special kind of business created using an IRS tax election. For a business to be considered an S corporation, you first need to charter a business as a corporation in the state where you have the headquarters. With an S corporation, financial liability is limited for owners or shareholders. This does not however protect owners against all litigation.
More Information on Business Structures