The simplest structure is the sole
proprietorship, which usually involves just one individual who owns
and operates the enterprise.
Advantages: The expenses and your
income from the business are included on your personal income tax
return, meaning business losses you suffer may offset the income
you've earned from other sources.
Disadvantages: You're personally
responsible for your company's liabilities. Raising money for a sole
proprietorship can also be difficult. Banks and other financing
sources are often reluctant to make business loans to sole
proprietorships.
Partnership
If
your business will be owned and operated by several individuals, look
at structuring your business as a partnership. Partnerships come in
two varieties: general partnerships and limited partnerships. In a
general partnership, the partners manage the company and assume
responsibility for the partnership's debts and other obligations. A
limited partnership has both general and limited partners. The general
partners own and operate the business and assume liability for the
partnership, while the limited partners serve as investors only; they
have no control over the company and aren't subject to the same
liabilities as the general partners.
Advantages: A partnership doesn't pay
taxes on its income but "passes through" any profits or losses to the
individual partners. At tax time, each partner files a Schedule K-1
form, which indicates his or her share of partnership income,
deductions and tax credits.
Disadvantages: Personal liability is a
major concern. Like sole proprietors, general partners are personally
liable for the partnership's obligations and debts. Each general
partner can act on behalf of the partnership, take out loans, and make
decisions that will affect and be binding on all the partners (if the
partnership agreement permits). Partnerships are also more expensive
to establish than sole proprietorships because they require more legal
and accounting services.
Corporation
A
corporation is an independent legal entity, separate from its owners,
and as such, it requires compliance with more regulations and tax
requirements.
Advantages: A corporation's debt isn't
considered that of its owners, so you're not putting your personal
assets at risk. A corporation can also retain some of its profits
without the owner paying taxes on them. Another plus is the ability of
a corporation to raise money. A corporation can sell stock, either
common or preferred, to raise funds. Corporations also continue
indefinitely, even if one of the shareholders dies, sells their shares
or becomes disabled.
Disadvantages: There are higher costs
involved. Corporations are formed under the laws of each state, each
of which has its own set of regulations. You'll probably need the
assistance of an attorney and accountant to guide you. And not only
are corporations subject to corporate income taxes at both the federal
and state levels, any earnings distributed to shareholders in the form
of dividends are taxed at individual tax rates on the owners' personal
income tax returns.
S
Corporation
The
S corporation has some appealing tax benefits but still provides
business owners with the liability protection of a corporation.
Advantages: With an S corporation,
income and losses are passed through to shareholders and included on
their individual tax returns.
Disadvantages: S corporations are
subject to many of the same requirements corporations must follow, and
that means higher legal and tax service costs. They also must file
articles of incorporation, hold directors and shareholders meetings,
keep corporate minutes, and allow shareholders to vote on major
corporate decisions. The legal and accounting costs of setting up an S
corporation are also similar to those for a standard corporation.
Limited Liability Company
Limited liability companies, often referred to as "Lacs," are hybrid
entities, bringing together some of the best features of partnerships
and corporations. "An LLC is a much better entity for tax purposes
than any other entity," says Ralph Anderson, a CPA and small-business
tax specialist with accounting firm M.R. Weiser.
Advantages: LLCs were created to
provide business owners with the liability protection that
corporations enjoy without the double taxation. Earnings and losses
pass through to the owners and are included on their personal tax
returns.
Disadvantages: The tax treatment for
LLCs varies by state. If you plan to operate in several states, you
must determine how a state will treat an LLC formed in another state.
If you decide on an LLC structure, be sure to use the services of an
experienced accountant who is familiar with the various rules and
regulations of LLCs.
|
