Choosing a business structure

Choosing the right business structure is a crucial step when starting a business. The entity you select has legal, financial, and operational implications. There are several types of business structures to choose from, including sole proprietorships, partnerships (general or limited), limited liability companies (LLCs), and corporations.

When choosing a business structure, there are several factors to consider. One factor is the level of control you want to have over your business. Are you the only owner? Or, are you going to own the business with someone else? Another factor to consider is taxation. Will the structure have pass-through or double taxation?

It's important to review and become familiar with the different types of business structures before making a decision. Legal and tax considerations, as well as personal needs and the needs of your individual business will help determine your structure.

The business structure you choose influences everything from day-to-day operations, to taxes, to how much of your personal assets are at risk. You should choose a business structure that gives you the right balance of legal protections and benefits.

In fact, with all of the decisions you make when starting a business, probably the most important one relating to taxes is the type of legal structure you select for your company.

Determining a legal structure for your business requires knowledge of your line of work, and an understanding of local, state and federal laws. Tax laws are constantly changing and the need for capital is always present, so it's crucial for business owners to evaluate which business structure offers them the advantages that will save them money and help them grow.

Here are the most common types of business entities and their notable features to help you decide on the best legal structure for your business:

Partnerships:
Partnerships carry a dual status as a sole proprietorship or limited liability partnership, depending on the entity's funding and liability structure. It involves two or more people who agree to share in the profits (or even losses) of a business. A primary advantage is that the partnership does not bear the tax burden of profits or the benefit of losses-profits or losses are "passed through" to partners to report on their individual income tax returns. A primary disadvantage is liability-each partner is personally liable for the financial obligations of the business.

Corporation:
Corporations can sell shares of stock to secure additional funding for growth, while sole proprietors can only obtain funds through their personal accounts, using their personal credit or taking on partners. A corporation is a legal entity that is created to conduct business. The corporation becomes an entity-separate from those who founded it-that handles the responsibilities of the organization. Like a person, the corporation can be taxed and can be held legally liable for its actions. The corporation can also make a profit. The key benefit of corporate status is the avoidance of personal liability.

Limited Liability Company (LLC):
Under an LLC, members are protected from personal liability for the debts of the business if it cannot be proven that they acted in an illegal, unethical or irresponsible manner in carrying out the activities of the business. A hybrid form of partnership, the limited liability company (LLC) , is gaining in popularity because it allows owners to take advantage of the benefits of both the corporation and partnership forms of business. The advantages of this business format are that profits and losses can be passed through to owners without taxation of the business itself while owners are shielded from personal liability.