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When starting your business, one of the most important considerations you will have to make is the business’s legal structure. Four main types of business structures exist: sole proprietorship, partnership, Limited Liability Company (LLC), and S-corporation.
The two most common forms are sole proprietorship and LLC. The structure you choose will affect your business in a myriad of ways, including management, legal and tax compliance.
The following are tips to help you know which is the best option for your startup:
Ease of Formation
First and foremost, you have to consider the ease of formation when comparing legal business structures. A sole proprietorship is the most straightforward business to form, and it can be as simple as starting to sell your products. You will still have to register for licenses, permits, and other permissions to start the business, but all you essentially need is an EIN (employer identification number) and business registration.
The process of starting an LLC is more complex. It would be best if you had a business name and a trademark check with an attorney to avoid lawsuits in the future. You will also require an attorney to help you write the business’s articles of incorporation and pay a filing fee to register the company.
You need company directors to form the board and determine a compensation structure and the roles they will play in the company. The fees for starting an LLC are also much higher than those of a sole proprietorship.
Liability
A crucial element you need to consider is the liability your business structure affords you. As a sole proprietor, you will be fully liable (unlimited liability) for all aspects of the business. You and the business are considered to be one entity.
Therefore, if the business does not fulfill its debt obligations, debtors can use your personal assets to pay for them. On the other hand, a limited liability company (LLC) means that the business is considered a separate legal entity from its owners. Your personal assets and reputation are free from repercussions of actions the business takes.
Growth
Another crucial factor you must consider when starting your business is its growth. A sole proprietorship is a one-person shop, and there are limits to the size of the business only one person can manage. Growth is always a key factor for company success.
The liability factor is also essential when a company grows to a particular size. An LLC is a much better business structure for growth. An LLC can have unlimited shareholders and a board of governors, which is the form the biggest companies take.
Therefore, if you want a nationwide or international business, you should register an LLC. On the other hand, if you only want a small business that you can control, a sole proprietorship is the better option.
Taxes
Taxes are a necessary evil of doing business, but you have to pay them. How you want to pay taxes for your business will influence the legal structure you choose for your business. Sole proprietors pay tax differently from LLCs.
Sole proprietors will pay taxes as individual business owners and report the business income as personal income, which means paying income tax. When paying self-employed taxes, you should know what tax forms to file. LLCs have more flexibility as it pertains to filing and paying taxes.
Pass-through taxation is the default method of paying taxes for LLCs, but they can choose to pay taxes as corporations. LLCs are also eligible for certain tax benefits not available to sole proprietors.
The amount of taxes an LLC pays will depend on the company, state, and other factors.
You have a serious decision to make when deciding on the legal structure of your business. Taxes, growth, ease of formation, and liability are the main factors to consider. It would be best to consider financing, profit distribution, and compliance, among other factors. The key to making the right choice is to know which structure works best for you and your business.
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