Business Structure

Posted on20. Oct, 2009 by larspk.

Business Structure

All entrepreneurs earning a taxable income must select a business structure and register their business and with the state. Registering your business is mandatory; however, entrepreneurs have a few options when it comes to the organizational structure of which the business operates. Choosing the right business structure is a very important decision that can have a large impact on how much money a company retains, how much risk owners are personally liable for, and how the business operates on a day to day basis. Take a moment and analyze your company. Are you looking to raise capitol from investors, have total control of management, limit personal liability, or share profits? Are you forming this business structure with a tight budget? Then, determine what it is going to take to launch your new business, how your business will be run, and where you see your business headed in years to come. Review the options below and choose a business structure that is best for you.

Sole Proprietor

The most common form of business and the easiest to operate. A sole proprietor business structure is fully owned by one individual or married couple. The sole proprietor has complete control over all management issues and all other business decisions. Sole Proprietorships are not taxed as a separate entity; all taxes are passed to the individual. A sole proprietor is responsible for all debts made by the company and personally liable for anything that may occur.

General Partnership

General partnerships consist of 2 or more people who agree to donate their time, money, or skills for ownership in the business. This business structure is relatively easy to set up; all terms of management, operations, and profit sharing are covered in the partnership agreement. Partners usually have an equal stake in profits and losses as well as unlimited personal liability for all debts of the company. A general partnership is not taxed, all taxes flow through to the individual. Losses may be deducted against other sources of incomes.

 LLC Companies

LLC Companies have become very popular in recent years due to their unique business structure. LLC Companies are formed by having members fill out the articles of organization and filing with the state. Members of an llc company can consist of one persons including entities. All members have management rights unless otherwise stated in the articles of organization. Members of an llc company enjoy the benefit of limited personal liability for company debts. Taxes are passed through to the individual unless the llc decides to be taxed as a corporation. This business structure takes a bit more effort to set up then a sole proprietor or partnership but is well worth it. Example, if somebody walked into your restaurant; slipped, tripped, and died (or seriously injured), you may have a heavy lawsuit on your hands. If you owned an llc company the most you could loose is the amount invested within your company. You get to keep your house, boat, planes……..well you get the picture. Limited liability is a good thing.

 C Corporation

The C Corporation is most suitable for large companies with high revenues. This business structure is appealing for investors and banks; please consider this if you are looking for outside money. Shareholders have limited personal liability up to the amount of money they have invested with the company. A C Corporation is taxed initially as a separate entity then again as dividends are paid to the shareholders. This is known as double taxation. Double taxation is an expensive option for an entrepreneur on a shoe string budget who routinely pays out salaries and dividends to pay for things like their mortgage. However, a matured company with high revenues can retain money within the company and save on taxes. Retained earnings are taxed at a lower rate then if they were directly passed through to the individual or subject to double taxation. This business structure is subject to many operational requirements, procedures, and hierarchies. It is essential that companies follow the operational guidelines of a C Corporation to be legally viewed as one.

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Incorporate or Form an LLC – Establish credibility with prospects, customers, vendors, and lenders

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