The legal structure you choose for your small business can affect the personal asset liability protection you will get, the financial flexibility that it allows, the tax consequences, and the credibility you will have when contacting financial institutions, future investors and clients. A business can be structured in several different ways and each has benefits and drawbacks that should be considered.

Here are legal structures you can choose from:

– Sole proprietorship – Individual who runs a business solely by himself. It is the cheapest and easiest way to structure a business. The sole proprietor has ownership of the company and full control. All the profits and all the debts are the responsibility of the proprietor. It is easy to open and close and you do not need to disclose information to the public.

– General Partnership – Co-owners of for a profit business can form a structure and decide between themselves who is responsible for what aspect of the business. It is relatively easy to start, there are few government regulations, and possible tax advantages when you split the income. It is shared risk and there is no need to disclose information to the public. But in a general partnership the partners are responsible for each other’s actions and debt. The partners also don’t have protection of their personal assets. General partnership is the default in the legal system when two or more people are involved in a business venture.

– Corporation – Creating a corporation requires you to set and provide information about the structure, meetings and records of the business. You can issue shares to the shareholders and the shares are transferable. There are strict requirements for a board of directors. You can buy shares into a corporation. If you want to work with venture capitalists and are working toward public offering, a corporation is the way to go. There are two kinds of corporation: S corporations. and C corporations. C Corporation can have an unlimited numbers of shareholders and unlimited number of class stock. S Corporation is smaller, not more than 100 shareholders and has one class of stock. The difference is evident in the tax code. C corporations are double taxed, on the profits and on the distribution to the shareholders. S corporations are taxed with “pass through taxation”. The profits are taxed only once.

– LLC – Limited Liability Company. It has a flexible structure in which the owners can draft their own operating agreement and define the duties of each of the members.

Sole ownership and general partnership do not provide protection against liability. Given the choice between LLC and a Corporation, many small business owners feel more comfortable with an LLC which can be more flexible and you can parcel out profits. It can be less complicated to set up than a corporation.

Your initial form of business doesn’t have to be permanent. You can start as a sole proprietor or a partnership and later can convert your business to an LLC or a corporation.

Author Bio: John Hemmendinger, CPA specializes in providing accounting and tax services to small business owners and professional practices in Cedar Knolls, NJ. For more information, go here: http://www.hemmendinger.com

Category: Business Management
Keywords: business advice, CPA services, accounting and tax services