Structuring for Success
There’s a lot to consider in starting your own business: developing a business plan, obtaining sufficient funding, marketing and a host of other concerns. Also critical is determining the organizational structure that best suits the business, because it will impact operating efficiency, the way you report income, the taxes you pay and your personal liability.
There are four basic types to choose from:
• Sole Proprietorship
• Partnership — General and Limited
• Corporation — S Corporation and C Corporation
• Limited Liability Company (LLC)
To make an informed decision, you must consider income tax law and tax rates, as well as issues such as transferability, control and potential legal liability. These matters likely will be complicated, and errors can be costly. That’s why it’s important to do research and seek out the advice of Certified Public Accountant(CPA) who can help you understand how business structure impacts your organization’s bottom line
Sole Proprietorship — As simple as opening a bank account for the business; some states and municipalities may require obtaining a license or permit.
Partnership — Started through an oral agreement, though a written agreement is advisable (and is required in some states) to agree on points such as profit/loss percentages; business decisions; addition and withdrawal of a partner; and terms of operation. Some partnership allocation structures may subject you and your business to more IRS scrutiny.
Corporation— Corporate documents are filed with the state and an annual fee is paid. Separate corporate bank accounts and records are created, and assets and money generated by the corporation are owned by the corporation (not the shareholders).
Limited Liability Company (LLC) — Created through articles of organization and an operating agreement; owners are called members and are not personally liable for the entity’s debts and liabilities.
Operation and Control
Sole Proprietorship — Ultimate control rests with asingle owner.
Partnership — Requires at least two partners who own the business and share in the profits and losses. The partnership agreement explains who will control and manage the business. In a general partnership with no agreement, all general partners have equal management rights and control. In a limited partnership, the management and control of the business is handled by the general partners.
Corporation — Bylaws (operating rules) are created to establish and explain the rules governing the organization. The shareholders have sole authority to approve articles of incorporation, mergers and dissolution of the company, and they elect the directors. Directors are responsible for major decisions, including selection of company officers.
LLC — Single-owner LLCs operate like sole proprietorships; multiple-member LLCs operate and are taxed like partnerships, although members may elect to treat and tax an LLC as an S or C corporation if they wish.
Sole Proprietorship — Limited to the assets and borrowings of the owner.
Partnership — Based on the number of partners and the written agreement, which should also explain how a departing partner will be paid for part ownership when he or she leaves, dies or retires.
Corporation — S Corporations can issue one class of stock to up to 75 shareholders (increased to 100 for years beginning after December 31, 2004). C Corporations can issue different classes of stocks and bonds and can increase borrowing capacity