Which Company Structure is Right for You?

Posted by Heather Villa, CMA, MBA, MSM on October 08, 2009 in: Bookkeeping & Accounting, Business - Plain & Simple

As a small business owner, you need to make important decisions regarding the business structure for your company. Each structure has certain advantages and disadvantages, particularly in the area of tax requirements. Due to the complexities of tax law, it’s highly recommended that you seek legal advice from a qualified tax professional prior to making your final decision.

Sole Proprietorship: Sole proprietorship is the simplest type of company structure. It may be your best choice if you work alone and have no significant liability risks. You may need to obtain a business license or other paperwork, but the requirements are generally less than for other business structures.

Depending on state laws, you may be able to operate a sole proprietorship under your name, or you may select a business name. You will probably not need a federal tax identification number, as your business taxes can be filed alongside your personal taxes, using additional forms.

A sole proprietorship generally provides no liability protection for the business owner. If anything goes wrong, you may be personally sued.

Partnership: A partnership is, in many ways, basically a sole proprietorship with multiple owners. The partnership will need a business name and a federal tax identification number. A partnership agreement must be drawn up and signed by all partners. This document must, among other requirements, contain a specific formula for division of profits between partners. The partnership agreement can be complicated, and may serve as evidence in a court of law, so it is highly recommended that you consult an attorney for assistance in drawing up the agreement.

Income from the company, in effect, passes through the partnership to the individual partners. The partnership will file tax forms demonstrating its financial performance, and a statement will sent to each partner documenting that performance and indicating that partner’s tax obligations. The partners are then responsible for paying those taxes. A partnership, like a sole proprietorship, provides no liability protection. The partners are eligible to be sued.

Limited Liability Company: The next step for partnerships that are concerned about liability is the limited liability company. The protections offered by LLC organization vary widely between jurisdictions. Therefore, it is highly recommended that legal counsel be obtained prior to organizing as an LLC.

Corporation: A corporation is, by far, the most complicated type of business structure to organize and run. However, it is also the only structure that fully protects the owners from lawsuits against the business. Unlike sole proprietorships and partnerships, owners of corporations are paid a wage (plus dividends) rather than “sharing” in the revenue of the company. The corporation is considered a separate legal entity. If a lawsuit is brought, it will be against the company rather than the company owners. Of course, the owners may still be sued for their own actions, but not those of the company. Organizing a corporation requires owners to follow a complicated step by step process. Therefore, any company should retain a qualified attorney to assist with the formation of a corporation.

Choosing one now doesn’t mean you’re locked in (although it does take some paperwork to move from one to another). Your small business may start as a sole proprietorship or partnership and could become a corporation, which is a common company structure roadmap for many small businesses that grow.

About the author: Heather Villa, MBA CMA MSM, is a Business Coach and Entrepreneur. She helps business owners achieve success in operations, productivity, project management, and social media. Read her other articles at http://hireheathervilla.com/resources/articles/ and visit http://heathervilla.com for more information.

Disclaimer: © 2009 Heather Villa. Permission is granted to repost this article. Article must be published in its entirety, including author bio, and all links must remain intact.

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