by Neil Clarkin
http://www.incorporation-services-guide.com
© 2005
When you decide to start your own business, one
of the most important decisions you will make is determining which
business entity is right for your business. This decision will
have a huge impact on how the business is operated, how taxes
are paid, and your personal liability. Different types of entities
have different advantages and disadvantages that must be taken
into consideration, but you should start with an understanding
of exactly what each type of business entity is.
The sole proprietorship is the choice for most
business startups, but it isn’t necessarily the best choice.
What makes this type of business structure attractive is that
it is the easiest and fastest way to set up a business. All that
is required for a sole proprietorship is a business license, which
can be obtained in about an hour by visiting your local court
house, paying the fee and filling out a short form.
A partnership is just like a sole proprietorship,
except that there is more than one owner. Again, a business license
will be required, and while not required, a legally binding partnership
agreement is highly recommended. The agreement should include
the rights and obligations of each partner, how profits and losses
will be divided, and how the partnership will be dissolved should
one of the partners want out. There are actually two types of
partnerships – a general partnership, and a limited partnership.
The main difference between the two is that in a limited partnership,
the limited partner’s legal liability is limited to the amount
of their investment, but this limited partner does not have an
active role in running the business.
Corporations are more complicated to set up,
but they also offer individuals the most protection. There is
additional record keeping and administration work that must be
done, but the business owner is not legally liable for the actions
of the corporation. Should be business get into financial trouble,
creditors cannot come after the individuals assets. There are
two types of corporations – C corporations and S corporations.
C corporations have tax disadvantages, such as double taxation,
and most businesses that incorporate choose the S corporation
structure, which allows income to pass directly through to the
individual shareholders.
The limited liability company (LLC) is an alternative
to corporations that many small business owners look to. Like
a corporation, the owners of the business are protected from liability,
but the business is taxed as a sole proprietorship or partnership.
There is typically less paperwork and expense involved in setting
up an LLC, as opposed to setting up a corporation. This is the
most feasible choice for many small businesses.
For the most protection, a small business owner
should opt to either incorporate the business, or form a limited
liability company (LLC). Even though a sole proprietorship or
partnership is easier to set up, and doesn’t cost as much
to start, it just will not offer the business owner or owners
an adequate amount of protection, and in the end, could cost the
owners more money than the cost of setting up a corporation or
LLC in the first place.
