Choose a Legal Structure For Your Business (Part 1)
Choosing a business structure is essential. Throwing your doors open and starting business immediately might be tempting, but it isn’t wise. You should consider how you want to handle your taxes, losses, capital gains and liability. Then pick the legal structure that best suits you. Here are descriptions of the existing business structures and some advantages and disadvantages of each.
In a sole proprietorship, one person owns everything and takes sole responsibility. It is easy to set up but also requires that the owner shoulder all risk. A sole proprietor is taxed on all income from the business at applicable individual tax rates. The business income and allowable business expenses are reflected on the individual tax return. No separate federal income tax return is required of the sole proprietor.
Pros
- Inexpensive to start.
- Simple to run.
- Has no double taxation on profits.
Cons
- Owner has unlimited personal liability for business liabilities.
- Business has unlimited liability for owner's personal liabilities.
- Ownership is limited to one person.
Partnership – This is essentially the same thing as a sole proprietorship, except that several people own the business together. Partners only pay a personal income tax but must file separate partnership tax returns. Partners can also be liable for the each other’s debts.
In the second part of this piece we will look at the different forms of corporations that can be established.
Comments
Sounds good so far