Starting a small business is an exciting prospect. Imagining your plans and dreams becoming a reality can also feel daunting. One of the first obstacles you will face is deciding on the right business structure. This is a crucial stage, so take time to consider the pros and cons of each option.
Businesses can take the form of a sole proprietorship, a partnership, a limited liability company or a corporation. Even if you have a basic understanding of these terms, applying them in the real world comes with certain implications.
A sole proprietorship means that you call all the shots. All the finances of the company are controlled by a single owner. You can grow the business without having to consult with a partner or shareholders. There are also typically fewer regulations applied to a sole proprietorship. However, as the sole owner of the business, you are also responsible for all debts and liabilities.
Partnerships can involve two or more people who are responsible for the management of the company. As a partner, taxes showing profits and losses are filed in accordance with your share of the business – rather than as a business. The two main issues for partners is potential shared liability, or the potential for creditors to pursue any partner’s assets in a debt dispute.
An LLC provides greater flexibility for members. You will benefit from limited liability from debts and obligations associated with the business. When filing taxes, an LLC can take advantage of whichever allocation offers the most benefits. Raising capital is a concern when forming an LLC, which often compels members to use their own personal assets to cover costs.
Liability protections are afforded to shareholders, officers and directors in a corporation. If you are a shareholder with investments in a business, liability ends with that investment. Stocks and bonds are issued to help a corporation raise capital. This allows the business to grow and honor any existing debts. The downside of forming a corporation is the obligation of double taxation. This involves filing a business tax return with the IRS, along with paying taxes at the appropriate tax rate.
If you need help deciding which structure is best for your business, reach out to the Law Offices of S. Mark Burr, P.C. in Alpharetta, GA, today.