When setting up a business, it is critical to take a look at the different business forms and options available to business owners. Selecting the most suitable business structure for the needs and goals of the business owner and their business can help plan for the future success of the business as it grows.
There are several different business structures to evaluate based on several criteria. The criterion can include tax consequences of the business structure, control of the business, cost of operating the business and personal liability implications.
A sole proprietorship is the simplest business form. The business is owned and operated by the sole proprietor whose business earnings are taxed on their personal income tax returns. A sole proprietorship does not provide any personal liability protection for the sole proprietor.
A partnership is run by partners typically according to the terms defined in a partnership agreement. The earnings of the partnership are taxed on the partners’ income tax returns. Partnerships also do not provide personal liability protection for the partners.
Limited Liability Company
A limited liability company (LLC) provides personal limited liability protection to the business owners, also known as members. This structure also provides members with the option to determine if they want to be taxed as a partnership or a corporation.
A corporation is a separate entity that provides complete personal limited liability protection for the owners and shareholders. Corporations are commonly considered double-taxed because the earnings of the corporation, and its owners and shareholders, are separately taxed. Corporations can also be costly to operate in part due to regulations associated with them.
Business formation is an important step in the life of any business and a lot of thought should go into it. Understanding the different business formation options, and the implications of each, can help get a new business owner and their business off on the right foot.