Business Formation: Choosing a Business Structure
Business success depends on many things, top among them the structure you choose. Thus, the business formation process should start with an in-depth analysis of legal structures and existing state, local, and federal laws. The input and guidance of a legal expert would be essential. Let’s learn more.
Types of Business Formations
The most popular types of business formations include sole proprietorship, corporation, partnership, Limited Liability Company (LLC), and cooperative. Below we scope down on each of these much more deeply.
The most fundamental business structure is the sole proprietorship. It is a one-person business, typically owned and operated by the same person or with the assistance of close family and friends. Legal liability is unlimited. In other words, the owner-operator is not individually protected from debts or other obligations from the business. In the eyes of the law, the business and the owner are one.
Despite the liability drawback, sole proprietorships are the least costly to start. Most inventors, freelancers, and young consultants start from this foundational platform before building mega-corporations. Costs include income taxes, office space, and equipment needs.
Benefits of a sole proprietorship
Easy to set up. The paperwork is easy, and there are fewer legal technicalities in the setup and operation of sole proprietorships (except for taxes, perhaps).
Low cost. It doesn’t require a large capital base to start a sole proprietorship. Running fees include labor and taxes.
Taxation. The owner and the business are one entity. Taxation happens once when you, as the owner, file your income tax returns.
The other business structure after a sole proprietorship is a partnership. These are simple businesses (by structure) owned by just two or more people. There is a general partnership where the owners equally share in the company. The other one is a limited partnership where one owner has more control than the other co-owners.
Partnerships combine the elements of sole proprietorship and limited liability partnerships (LLP). The co-owners share profits and losses and collaborate in decision-making. Partnerships have unlimited liability.
Partnerships cost more to start than a sole proprietorship. It would be wise to have a business attorney glance over your partnership agreement. Hess-Verdon lawyers welcome your calls and questions about the partnership to help you lay a foundation for a thriving business. Partnerships are not all bad. Sergey Brin and Larry Page first started Google as a partnership. Soon every investor wanted a share. So was Steve Job’s Apple.
Here are the benefits:
· Easy formation
· It is easier to obtain a business loan compared to a sole proprietorship
· Taxation happens one at the owners’ level -owners should file tax Form 1065
Limited liability company
The famous LLC is a mixed and mashed business structure. It looks like a partnership, but members enjoy limited liability. Taxation happens once at the owner level.
Owners are protected from the business liabilities of the company. Profits and losses are shared equally among owners.
Do not mistake an LLC for a small business structure. A few significant businesses across the world started as and still operate under this structure. An example is the world-renown Anheuser-Busch beer company. Sony is an LLC too, and so is IBM Credit.
One of the highly complex business structures to consider is the corporation. The business is legally a separate entity with rights and powers to act, sign documents, get loans, issue loans, sue, or be sued.
There are many types of corporations:
C corporations: Shareholders own them, and taxation happens twice at the business and owner level. The advantage is that you can have as many investors as you want. Amazon and the Bank of America are C-corps.
S corporations: They are much like partnerships. Taxation happens once at the owner level. S-Corps can only have a max of 75 shareholders.
B corporations: These are business entities whose sole objective is to impact society positively. An example is The Body Shop. A B-Corp can be taxed as a C-Corp or S-Corp.
Nonprofit corporations: They focus on helping communities and individuals. These corporations-such, as the Red Cross-are not taxed.
Benefits of choosing the corporation structure
· Limited liability -owners are shielded from all legal claims against the business
· Continuity-these businesses can last many lifetimes, long after the owners pass away or opt-out
· Capital-you can get financing from a large number of investors. Banks love this kind of risk spreading.
One other option you have when pondering business structure in California is Cooperatives. They are owned by the people they serve. It has owners-cum-members called user-owners. They vote in the company’s direction, decisions and share profits.
The benefits of a cooperative include:
· Lower taxes compared to corporations
· Wide funding from user-owners
· Owners earn discounts on products and services
The Big Decision: How to Choose a Business Structure
There are many types of businesses, as seen above. The big question is which one you should choose. Let’s guide you a little further on.
Choose partnerships for unlimited growth.
Sole proprietorships are easier to start, but partnerships allow more room for growth. The latter gives you increased opportunities to double your capital base since each member-owner contributes.
For limited liability and growth, choose corporations.
Corporations are complex and have many requirements to form, but they have significant advantages. These include limited liability and increased capital from shareholders and investors. For success in these types of business formations, it would be wise to work closely with a practiced business attorney.
Choose LLC or S-Corp for more straightforward taxation.
LLCs, just like sole proprietorships, have simple taxation requirements. Owners file business taxes as part of their yearly income tax obligations. On the other hand, an S-Corp reduces your tax burden. Unlike a C-Corp, where both the business and shareholders pay taxes, taxation only happens once at the owner level.
When forming a business in California, a qualified attorney can help in the following:
· Understanding legal requirements and liability types and scopes
· Handling paperwork that entails technical legal concepts
· Saving your time by handling the entire legal side of things
· Trademarking your name and intellectual property
· Advising and planning your business taxes
For legal assistance when choosing a structure or forming a business in California, please call Hess-Verdon at (949) 706-7300.
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