What Business Structure Is Right for Your Business?

When making grand plans for your new business, deciding which business structure works best may seem daunting and rather unglamorous. There are many more exciting things to think about like location or marketing or a logo. However, forming or incorporating your business formally has a lot to do with how it will be taxed and whether or not you will be personally liable for losses and tax problems. Become familiar with the options and what the pros and cons are of each to set your business up for success from the start.

 

Three of the most common business structures are:

 

Sole Proprietorship

 

The sole proprietorship business structure is the most simple. The business is run by one person, and that person reports profits and losses on a personal tax return. The IRS will not issue a separate tax number for the business. The biggest drawback to this type of structure is you are personally liable for business taxes, and if the company suffers a legal blow, such as a lawsuit, your personal property may be seized to pay up.

 

Limited Liability Company (LLC)

 

The second most common form of structure for a business is an LLC. Your business would have members or owners who each hold a certain number of shares to the company. As the name suggests it limits liability each member is responsible for by the number of shares they own, something that is established by founding documents filed with the state the company is incorporated in. In this way, each member shares in the profits and losses proportionate to the number of shares owned. It also keeps the personal property of each member outside the reach of debtors. The IRS would expect a business tax return to be filed each year on behalf of the LLC.

 

Partnership

 

A partnership is an unincorporated business that is owned by more than one person. The profits and losses are split evenly among the partners, making everyone equally responsible for reporting their share of the money in and out on individual tax returns. Members of a partnership can be business entities as well. If something goes wrong under this type of business structure, the personal property of each partner is equally up for grabs.

 

Choosing the proper business structure for your fledgling business may best be done with the advisement of a professional. However, it is essential to have a general idea of how you want it to be organized.

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