When starting a business, you’ll need to select an ownership structure for your new venture. There are pros and cons to each business structure and it’s beneficial to devote time to learn about each one and choose the best for you. All of the decisions you make when beginning this journey are important, but choosing the type of legal structure is probably the most important thing relating to taxes.
There are five main business types you should be aware of:
A sole proprietorship is the most basic business entity. It is essentially a business of any type owned by one individual. Sole proprietorships provide great flexibility of management style, few legal requirements and simple taxation. However, if you are the sole proprietor of a business, you could be held liable for any debts sustained by the business.
This describes any business where there is more than one owner involved. Partners can include individuals, corporation or trusts. The ownership is shared among the partners, along with all income and debt liability. Each person contributes money, property, labor or skills and should expect to share responsibly.
General partnerships constitute equal share of responsibilities, while limited partnerships provide partners with the opportunity to opt out of most of management decisions. This may be intriguing to those who are looking for a short-term enterprise.
This is a more complex and expensive form of business. According to Entrepreneur, “a corporation is an independent legal entity, separate from its owners, and as such, it requires complying with more regulations and tax requirements.” A benefit to this is the liability protection one receives when choosing this type of business structure. However, corporations cost more and require more accounting and tax preparation services.
This may interest small business owners rather than choosing a regular corporation. S corporation business owners still have liability protection, while also enjoying tax benefits that a regular corporation can’t offer.
Limited liability company
This type of business provides business owners with the liability protections that corporations have without the double taxation. LLC is like S corporation, however, there is no limitation on the number of shareholders an LLC can have.
Starting a business is a major decision. You want to ensure that you understand the different types of business structures and choose which is best for you.