Before you launch a business you have to decide its legal structure. The decision will determine how and how much tax you pay and the extent of paperwork involved, as well as the extent of your personal liability should things go wrong.
Here's the simplest business type :
Sole Proprietorship: Owned entirely by you, and you are personally liable for all business debts and obligations. This is the simplest form of business organization. Other than possible licences and permits, there's not much you need to do to get going. You don't need to register your business with the state, but many states require a sole proprietor to use their own name for the business name unless they formally file another name as a trade name, or a fictitious "doing business as," or DBA name. Sole proprietors file business taxes on their personal income tax returns but must clearly keep personal and businesses finances separate.
Advantage? It's easy and cheap and you're in total control.
Disadvantage? Your house could be taken to pay a business debt, and you might find it hard to get a bank loan.
For any of the following business types, you'll need to register your business and file certain documents with the state (learn more about that here). Here are other types, as described by the Small Business Administration:
Partnership: A single business owned by two or more people. Advantages include pooling skills of two or more owners, plus the setup if fairly simple and much like a sole proprietership. Disadvantages range from the potential for arguments to having the partner run off to Mexico with all your cash. The equivalent of a prenup is in order. (Learn More]
Corporation: A legal entity owned by shareholders. While you can escape some liability issues, you'll find a far more complex batch of paperwork. (Learn more)
S Corporation: A special type of corporation created through a tax election. An eligible domestic corporation can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S corporation. According to the IRS, S Corporations are "considered by law to be a unique entity, separate and apart from those who own it." This allows for a limit on the financial liability for which an owner (aka "shareholder") is responsible. Nevertheless, liability protection is limited - S Corps do not necessarily shield owners from all litigation such as an employee’s tort actions as a result of a workplace incident. (Learn more)
Limited Liability Company (LLC): A hybrid legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. The “owners” of an LLC are referred to as “members.” Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations, other LLCs, and even other entities.
Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. (Learn more)
Non Profit: An organization engaged in activities of public or private interest where making a profit is not a primary mission. Some Non Profits are exempt from paying federal taxes. (Learn more)
- Hiring Your First Employee
- How to Write a Business Plan
- Five Ways to Feed Your Businessâ Growth
- Infographic: Small Business Facts