Jackie Warner, Esq

Choosing The Right Structure For Your Business

Pros And Cons Of Business Structure

Starting a business can be a very exciting and rewarding venture. However, it involves a lot of preparation and planning, particularly at the initial stages to ensure success. For example, a business and marketing plan must be developed, which is a written document that will help you define your business and organize your goals. Here, we will discuss the first and most important thing one should do: examine and determine the legal structure for your business. Your business structure will depend upon factors including third-party claims, tax considerations and your financial objectives.

THERE ARE BASICALLY FOUR TYPES OF BUSINESS STRUCTURES WHICH YOU SHOULD CONSIDER WHEN PLANNING YOUR BUSINESS. THESE INCLUDE SOLE PROPRIETORSHIPS, PARTNERSHIPS, CORPORATIONS AND LIMITED LIABILITY CORPORATIONS (LLC).

SOLE PROPRIETORSHIP

A sole proprietorship is owned and operated solely by one person (a spouse, if any, may be involved in the business). The owner must operate the business using his or her legal name, rather than a fictitious name or a d/b/a (doing business as).

Pros

Simple to form or create. No legal filings required. No business return to file (though some states may require the filing of an unincorporated business return).Tax reporting is simplified-profits and losses are reported on individual tax returns.

CONS

Owner not afforded protection against personal liability. If business is sued, the owner's personal assets may be at stake.

PARTNERSHIP

Created by to or more people who agree to share in the profits and losses of a business.

PROS

No formal organization process (other than registering the business name), but partnership agreement is highly recommended Tax reporting is simplified.

CONS

Partners do not have protection against personal liability-each partner is personally liable for the negligence and wrongdoings of the other partners' share of debts and obligations.

Corporation

A legal entity formed in a particular state generally by the filling of Articles (or a Certificate) of Incorporation with the Department of State.

PROS

The corporation is treated as a separate "person" and generally shields the owners (known as shareholders) from personal liability. Familiar form which often "credentializes" a business. Corporate form helps to attract investors.

Cons

Strict corporate record keeping required-if not, corporate status can be challenged. Additional costs involved (e.g., incorporation filing fees; corporate tax return preparation)

LIMITED LIABILITY COMPANY (LLC)

A legal entity which is essentially a hybrid between a corporate and a partnership.

PROS

Affords the owners with protection against personal liability (like the corporation) coupled with preferential tax treatment (like a partnership). Failure to maintain strict record keeping will not negate the status of the LLC. Assets held in an LLC may be even greater protection to owners(as opposed to a corporation) against third-party claims.

Cons

Additional costs involved (i.e., formation filing fees). Relatively new in most states so LLC's are not widely understood by the general public and case law regarding them is limited.

It is important to remember that all businesses are not created equally. Learn as much as you can about the various business forms. Consult both an attorney and an accountant before reaching a final decision. Turn your vision into a reality. You can do it!

Article Tags: Personal Liability

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