Once you’ve come up with a name, it’s time to decide what kind of ownership you want. This decision is extremely important and should not be taken lightly. After all, the legal ownership you choose will have serious tax implications and be decided on the amount of risk you want to deal with.
Four Kinds Of Business Ownership
So, what kind of ownership should you place your business under? Well, that depends on what you’re looking for. There are four types of ownership you can form your business under:
- Sole proprietorship
- Partnership
- Corporation
- Limited Liability Company (or LLC)
Which of these is best for you? Well, let’s take a look at each one including their positive and negative aspects and what kind of business the ownership is best for.
Sole Proprietorship
Of all the business ownerships you can choose from, this one is the simplest form and very popular among solo entrepreneurs. The business’ income and expenses are included on the personal income tax return.
Positive Points
1.Any losses you suffer with the business can negate the earned income of other sources.
2.It’s an easy, inexpensive choice, which is great when you’re looking to test your business idea.
Negative Points
You have to deal with all the company’s liabilities, meaning if you have to file for bankruptcy or someone sues you, your personal assets are at risk.
Who Is This Option Best For?
Sole proprietorship is best for companies with no or just several employees – such as consultants – that can handle legal issues with sufficient insurance or have no assets that they must protect.
Partnership
Now, there are two kinds of partnership you can choose from:
- General – A creditor has the option of going after one or all business partners.
Limited – This kind of partnership is made up of one general partner who has unlimited personal liability with limited partners only being liable for what they put into the company. - All losses and profits must be reported on the informational tax return and filed with the personal tax return.
Positive Points
1.Like sole proprietorship, this is another inexpensive option and simple way to start a business.
2.Several tax advantages that come with reporting profits and losses on personal income tax.
Negative Points
1.All general partners are at personal risk, even if one partner causes the company to go belly-up.
Who Is This Option Best For?
This option is ideal if there will be many owners of the business. It’s generally seen in the real estate business market.
Corporation
This is a self-governing legal entity – away from owners. Better protection of personal assets is given should the company be sued or must file for bankruptcy. There are two types of corporation:
- C-Corporation – This is mainly used for high-profile companies
S-Corporation – This is the most common kind of corporation - Corporations have a board of directors they must answer to as well as shareholders.
Positive Points
1.Personal assets are generally not as risk since the company’s debt is not seen as the owners’ debt. The only personal assets at risk are what someone puts into the company.
Negative Points
1.Compared to the other two options, this is far more complicated and costly. Thus, more tax-accounting help and preparation is needed to make sure all rules are being followed.
2.The S-Corporation has a 100 shareholders limit.
Who Is This Option Best For?
This option is best for businesses that must have liability protection and room to grow. It’s usually best for restaurants and manufacturers.
Limited Liability Company (LLC)
This option was developed to give some liability protection to corporations so they would not be doubled-taxed. Losses and earnings go through owners and are placed on their personal income tax return.
Positive Points
1.LLCs give liability protection without all the corporation formalities.
2.They are often cheaper to set up than corporations.
3.There are more attractions with this option over the S-Corporation because there is no limit on the number of shareholders.
Negative Points
1.The entity chooses how to be taxed, which means a person may need to pay a self-employment tax on their share.
Who Is This Option Best For?
This flexible business structure is ideal for companies who are just beginning and unsure if they will grow within the first year.
Now, think back to what you’re looking to do and accomplish. Which is best for you?
