What Legal Form of Business is Best for You?
What Type of Entity Legally Will Your Company Be?
Nov 9, 2008
What legal form your business will take is an extremely important decision. There are a number of choices and each one has the ability to affect different aspects of your business. It is important to understand the differences so that you can make an informed choice. So what does each form of business offer you?
Sole Proprietorships
Let’s start with the most common form of business a sole proprietorship. This type of business in a sense is just an extension of you, at least legally. You as the owner have full control over the business and its responsibilities. This means for good or bad everything falls on you. If you run into financial problems then creditors have the right to go after your personal assets if they haven’t been paid. In the event of legal action then you will be held responsible. And in the case of filing your taxes the business and you are one entity. This means you need to include all of your business income and expenses on your tax return. But you do get to be your own boss. And the paperwork will be a lot easier.
General Partnerships and Limited Partnerships
Next we have partnerships. There are general partnerships and limited partnerships. They are similar to a sole proprietor in many ways but there are a few differences. For one there is obviously more than one person involved in the ownership of the business. In the case of a general partnership the responsibilities are shared equally unless the agreement states otherwise. Each partner is responsible for all the liabilities of the business and each partner reports their share of the earnings on their personal tax returns. In addition with any agreement made by one partner both partners are equally responsible for.
Limited Partners
A limited partnership is a little different. What you will have is a general partner that controls the business and a limited partner. The limited partner might be a silent investor in the business. A limited partner is only responsible for the amount of the investment they made. For tax purposes they still have to report any income that they received from the business.
Forming a Corporation
Corporations are the next form of business. Specifically what is sometimes known as a C corporation and an S corporation. A corporation is a separate legal entity. It receives what is known as an employer identification number or EIN. This number can be thought of as a social security number for businesses. Just without the retirement check. Both forms of corporations have shareholders, an elected board of directors, and officers. But it only takes one person to form a corporation. And you can elect yourself to be the only board member.
Shareholders of the Company
Typically the shareholders are only liable for the amount invested in the stock of the company. But beware if you are the person actually controlling the company and you default on your liabilities because creditors may try and collect from you. Whether they have the right to do so will depend on the actions you took to secure the credit. C corporations also pay their own taxes but if a dividend is issued then the shareholders will be responsible for paying taxes on that money as well. In an S corporation the shareholder is responsible for reporting their portion of profits and losses on their individual tax returns.
You Can Change the Legal Form of Business Later
Regardless of which form of business you decide is best for you it is always good to get a second opinion. Consulting a lawyer before making a decision is always a wise idea. Just because you think a particular legal form of business is best does not mean that it is. The legal form of business though can be changed at a later date if necessary. You just need to take the time to decide what is right for you.
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