Forms of Business Structure
If you have forward-looking dreams and want to take a step towards starting your own business, the first step you should take is to know the pros and cons of all company structures. While focusing on the material and important issues in the setup of a company, you should not miss out the structure you want to have in your dreams. Unfortunately, many people are unable to adjust this balance. The important thing is not to form a company, but to build a blissful structure that is planned, creates value and includes dreams. You can be sure that the importance of how you button the first button of the shirt will emerge over time.
As you would appreciate, it is unfeasible to go through each company structure in a single article, but I tried to briefly explain in order to visualize them as a whole. In the following articles, I will consider each company one by one and publish a detailed article that will solve all the questions in your mind.
Sole Proprietorship: The simplest type of business and very easy to establish. This type of business represents about 73% of all businesses in the USA today. No formal action is required to set up a sole proprietorship. This status automatically comes from your business activities. Of course, if necessary, you need to obtain the necessary licenses and permits pertaining to your business in which regulations vary by industry, state and county. I will answer before you ask, as its name implies, regardless of who the other person is, you cannot start a sole proprietorship with anyone, your spouse as well. If you do choose to begin a business with your spouse, then you will have to form a general partnership.
The business itself is not taxed separately – the sole proprietorship income is taxed in Schedule C on the owner’s personal tax return. In addition to income tax and self-employment (Social Security and Medicare tax) tax based on the net income of your business, if any, collects and pays sales taxes on taxable goods and services sold and if sole proprietorship has employees, you must fulfill the employment tax responsibilities. The biggest disadvantage of the sole proprietorship is that sole proprietors are liable for the company’s liabilities, debt, and losses. Therefore, if your business goes into debt, you may risk losing personal assets.
Partnership: A business owned by two or more people who share responsibilities and profits. In order to explain this title, we need to open a little big parenthesis about types for; General Partnership (GP), Limited Partnership (LP), Limited liability partnership (LLP) and Limited liability limited partnership (LLLP)
General partnership is the second of the simplest business entities to create after Sole Proprietorship. General partnership is an unincorporated business with more than one owner. Partnership agreement isn’t required by law, but it can go a long way toward helping resolve conflicts that could arise between partners in the future. A general partner is considered the owner of the partnership. General partners are actively involved in the management of the partnership and can make decisions on the company’s behalf. All partners are held 100% liable for business debts. Absent an agreement to the contrary, all partners have equal rights to manage the partnership and voting power are not based on the amount contributed and partners are not entitled to compensation for services rendered to the partnership.
Unless otherwise agreed in the agreement, decisions regarding matters in the ordinary course of the business may be controlled by majority vote. Matters outside the ordinary course of the business require consent of all the partners. A partner may assign her interest in the profits and surplus at any time but such a transfer doesn’t make the assignee a partner, ownership requires unanimous consent. With regards to dissociation, dissociation of a partner doesn’t cause a solution and winding up of the business of the partnership, but a dissociated partner may be held liable for debts incurred by the partnership for up to two years.
As related to tax issues; general partnerships are required to obtain an Employer Identification Number from the IRS. The profits and losses of the partnership’s business are passed through to the partners on an equal basis, regardless of the differing contributions in time and effort among the partners (unless otherwise agreed in the partnership agreement). A general partnership is also required to file an informational return called Form 1065. To be accepted by the IRS, Form 1065 must be signed by at least one of the general partners. Along with Form 1065, the general partnership must also prepare forms called Schedules K/K-1.
Limited Partnership requires a formal agreement between the partners by filing a certificate of limited partnership with the state. They have at least one general partner who is fully responsible for the business and one or more limited partners who provide money but do not actively manage the business. Limited partners are often called “passive investors” or “silent partners”. General and limited partners share profits and losses in proportion to partners’ contributions. A limited partner is not liable for any loss beyond his/her capital contribution. A general partner may also be a limited partner at the same time and may be a secured and unsecured creditor of the partnership. Partners (whether general or limited) cannot transfer ownership interest without unanimous consent.
Limited partnerships is a pass-through entity and 1065 Form along with K-1 is required as in the general partnerships. One tax advantage of limited partnerships is that only general partners have to pay self-employment taxes on their earnings from the company (but Limited Partners pay self-employment tax on guaranteed payments). In addition, since limited partnerships have investors, they are subject to many of the same securities laws which are the laws and regulations governing financial instruments such as stocks, mutual funds, and bonds as is corporation.
Limited Liability Partnership differs from a general partnership or a limited partnership in that all partners are protected from liability for the wrongful acts or negligence of other partners in an LLP. They can actively participate in the business but aren’t personally liable for malpractice claims filed against their colleagues. LLPs are popular among professionals such as doctors, CPAs, lawyers, and so on. An LLP is formed in the state in which the partnership does business. A limited partnership is a pass-through entity and 1065 Form along with K-1 is required.
Limited liability limited partnership is a newer type of partnership available in some states. An LLLP is similar to a limited partnership because it has general and limited partners. However, the big difference is that the general partners have limited personal liability for the partnership’s debts and obligations. That means partners are only liable up to the extent of their contribution to the partnership.
Limited Liability Company (LLC) combines the best parts of corporations, sole proprietorships, and partnerships into one business entity offering owners liability protection, flexible management structure, and certain tax advantages. LLCs can be owned by one or more people, who are known as LLC “members.” An LLC with one owner is known as a single-member LLC and an LLC with more than one owner is a multi-member LLC.
An LLC is formed by filing articles of organization with the secretary of state. LLCs often draft operating agreements but requirements for operating agreements vary by state. Some states require an LLC to draft an operating agreement and file it some states merely require the LLC have an operating agreement but have no filing requirement. An operating agreement allows the LLC to structure the management of its business, in addition, articles of operating agreement establish ownership, share of profits or losses, rights and responsibilities, and what happens when a member leaves the LLC.
Unless the articles or operating agreement provides otherwise, all members have a right to participate in management. Voting strength and profit/loss sharing are proportional to contributions. Unless otherwise provided in the agreement, a member of LLC is free to assign her interest in distributions, but is not free to assign any rights to manage LLC, transferability of ownership is similar to that of a partnership. When it comes to tax purposes, LLC members can decide how they want to be taxed. Single-member LLC taxed similarly to a sole proprietorship, multi-member LLC treated as a partnership or Members of the LLC can decide to file like they’re a corporation.
Corporation: A type of fully-independent business with shareholders. One of the most complex business types. A corporation is considered by law to be a unique entity, separate from those who own it. This means, the profits generated by a corporation are taxed as the “personal income” of the company. Then, any income distributed to the shareholders as dividends or profits are taxed again as the personal income of the owners. Corporation are created by filing articles of incorporation, as well as the articles of incorporation, a corporation will have bylaws containing rules for running the corporation such as setting out the authority of the corporation’s officers. After filing the Articles of Incorporation, you will need to issue stock to the shareholders, unless otherwise provided, each share of stock is entitled to one vote.
The shareholders generally have no power to manage the corporation, they elect the board of directors but generally the board does not manage the corporation; instead, it appoints officers to govern. The tax laws permit certain corporations to elect to be taxed like partnership; An S Corporation, also known as an S subchapter, refers to a type of corporation that meets specific Internal Revenue Code requirements. To become an S-corporation, your business first must register as a C corporation or an LLC. A business must meet specific guidelines by the Internal Revenue Service (IRS) in order to qualify as an S corporation. If it does, it may pass income directly to shareholders, without having to pay federal corporate taxes.
