When it comes to important decisions, the way that you elect to structure your business leads the pack. The type of business structure that you choose is not only important for organizational reasons, but for financial and tax reasons as well. Corporate structure also influences your potential to raise funds and the amount of personal liability that you will shoulder in the event of a legal issue.
The most basic type of corporate structure is the sole proprietorship model. This model involves a sole individual who owns and operates the business. This is the best choice if you prefer to work alone and the simplest choice from a tax perspective. As a sole proprietor, any business expenses and income will be included on your personal tax return. Many business owners prefer this structure since any losses you incur can offset the income that you bring in from other sources.
When you are a sole proprietor, the government will allow you to pay your estimated taxes in four equal amounts during the year. This can be advantageous since your profits will only be taxed once and you will retain complete control over every aspect of your business. For many people, this can be a daunting prospect since you will be held personally responsible if any financial or legal issues occur. This means that your assets can be seized by financial institutions in order to settle a debt.
When a business is owned by several individuals, it is known as a partnership. There are two types of partnerships – general and limited. General partnerships allow the partners to manage the business together, but they will be held responsible for their partner’s debts and other issues. A limited partnership includes both general and limited partners, but the limited partners will only be viewed as investors, not operators or owners. This structure requires you to file a multitude of tax forms and maintain complex financial records.
A corporation is the most expensive and complicated type of corporate structure. It is an independent legal entity, but it remains separate from its owners. Since the company operators and employees do not own the business, their personal income and assets cannot be seized. The owners of a corporation are also allowed to keep some of their profits without having to pay taxes on them.
In short, all three business structures have their distinct advantages and disadvantages. Before choosing a structure, you should consider factors such as your personal needs and the size of your business. Remembering these factors will ensure that you choose a structure that is conducive to your finances and operations.