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Business Entities – What Are The Choices?
by: Neil Clarkin
When you decide to start your own business, one of the most
important decisions you will make is determining which business
entity is right for your business. This decision will have a huge
impact on how the business is operated, how taxes are paid, and
your personal liability. Different types of entities have
different advantages and disadvantages that must be taken into
consideration, but you should start with an understanding of
exactly what each type of business entity is.
The sole proprietorship is the choice for most business startups,
but it isn’t necessarily the best choice. What makes this type of
business structure attractive is that it is the easiest and
fastest way to set up a business. All that is required for a sole
proprietorship is a business license, which can be obtained in
about an hour by visiting your local court house, paying the fee
and filling out a short form.
A partnership is just like a sole proprietorship, except that
there is more than one owner. Again, a business license will be
required, and while not required, a legally binding partnership
agreement is highly recommended. The agreement should include the
rights and obligations of each partner, how profits and losses
will be divided, and how the partnership will be dissolved should
one of the partners want out. There are actually two types of
partnerships – a general partnership, and a limited partnership.
The main difference between the two is that in a limited
partnership, the limited partner’s legal liability is limited to
the amount of their investment, but this limited partner does not
have an active role in running the business.
Corporations are more complicated to set up, but they also offer
individuals the most protection. There is additional record
keeping and administration work that must be done, but the
business owner is not legally liable for the actions of the
corporation. Should be business get into financial trouble,
creditors cannot come after the individuals assets. There are two
types of corporations – C corporations and S corporations. C
corporations have tax disadvantages, such as double taxation, and
most businesses that incorporate choose the S corporation
structure, which allows income to pass directly through to the
individual shareholders.
The limited liability company (LLC) is an alternative to
corporations that many small business owners look to. Like a
corporation, the owners of the business are protected from
liability, but the business is taxed as a sole proprietorship or
partnership. There is typically less paperwork and expense
involved in setting up an LLC, as opposed to setting up a
corporation. This is the most feasible choice for many small
businesses.
For the most protection, a small business owner should opt to
either incorporate the business, or form a limited liability
company (LLC). Even though a sole proprietorship or partnership is
easier to set up, and doesn’t cost as much to start, it just will
not offer the business owner or owners an adequate amount of
protection, and in the end, could cost the owners more money than
the cost of setting up a corporation or LLC in the first place.
About the author:
Neil Clarkin is a contributing writer at Incorporation Services
Guide. You can find further information on business entities and
learn how to form your corporation or limited liability company
(LLC) online at
http://www.incorporation-services-guide.com
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