If you are planning on building a business empire, you need to start thinking about the company’s legal structure. There are four major business structures, but how do you decide which one is best in your case? If you are already thinking about business structures, we understand that you will need all the different legal systems out there.
Here are the business structures you need to keep in mind while building your concern from the ground up.
Sole Proprietorship
A sole proprietorship is owned and run by a single entity. It is the most common form of legal structure for small businesses. When it comes to taxation, the company is not required to file a tax return; instead, the owner reports the profits as a part of income and pays the tax. With the minimum requirement of formalities, this is the simplest way of doing business.
Pros
- Easy and cheap to build
- Absolute control over business
Cons
- Unlimited exposure risk — mitigation through insurances
- Difficult to attract investors
General Partnership
A partnership is what the name suggests and is a business association between two or more people. A partnership has little to no requirements in terms of formality, except the partnership agreement, which is the cornerstone of the venture. The partnership is a tax reporting entity but not a paying one. Each partner pays the tax on their share of profit/loss. According to John Giorgi, an expert business lawyer, it is vital to have an attorney create the partnership agreement.
Pros
- Easy maintenance
- Profit and losses passed through the owner tax returns
Cons
- Partners have liabilities
- Oversight and management issues outside the agreement details
Limited Liability Company (LLC)
The LLC is a hybrid of a corporation and a partnership. LLC stakeholders are called members, and it can include multiple individuals, groups, other LLCs, and even foreign entities. The LLC entity is also a pass-through entity as far as taxation is concerned. However, there are even more benefits as LLC members have protection from personal liability concerning debts and claims. To form an LLC, you need to pay a filing fee and articles of operational agreements between the parties, if required.
Pros
- Limited liability, which means the entity is responsible for the liabilities
- Profits/losses are passed to the members and taxed individually
- Unlimited members
Cons
- Additional taxes, usually state levied
- Every share of profit represents taxable income
Corporations
It is the most complex business structure. A corporation is a legal entity entirely separate from the people and stakeholders who run the organization. A corporation can enter into contractual agreements different from that of the shareholders. Ownership is designated by issuing and owning shares of the available stock. When it comes to tax, corporations can be C-corp, subject to double taxation with the added corporate tax or S-corp, which avoids the double taxation by reporting the corporation profit/loss on personal returns.
Pros
- Shareholders have limited liability
- Favorable with investors
Cons
- Extremely complicated process and costly
- Earnings subject to double taxation
- Highly regulated, extreme governance and oversight
We hope that you can create the perfect harmony for your venture with the information regarding the legal business structures.
Originally published at https://legodesk.com on June 26, 2021.
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