Corporate Structure Basics: Selecting the Right Structure for your Business
Selecting the Right Structure for your Business
Selecting the right corporate structure for your business can be one of the most important decisions you make as a business person. It will have a huge impact on how you are taxed by the government, as well as in the amount of paperwork required of your company. It will also determine the level of personal liability you are exposed to, and it will impose constraints on how you go about raising money.
A sole proprietorship is one of the most common forms of corporate structure, and it generally involves a single individual who is both owner and operator of the business. Entrepreneurs who expect to work alone in the company should choose this business type. It’s very easy to file your income taxes, because you can do it right along with your personal taxes on form 1040, but you are responsible for any debts incurred by the company.
A business partnership is the form you should select if your company will be owned and operated by more than one individual. There are two kinds of partnerships to choose from, one being a general partnership and the other being a limited partnership. In a general partnership, all the owners have equal responsibilities, investments, and debts.
In a limited partnership, there are usually general partners who own and operate the company, as well as limited partners who have no involvement with operations, but serve as investors only. Filing taxes becomes a bit more complicated, because each partner has to report income and loss on a separate IRS form. Just like sole proprietors, partners are personally liable for the company’ debts, so they are vulnerable to having their own assets lost.
The Corporation is the other business entity commonly chosen by business owners. A corporation is completely separated from its owners, and this has advantages and disadvantages. This separation factor insulates owners against any debts incurred by the company, or any lawsuits it is exposed to. On the other hand, a corporation is subject to a great many more regulations and tax requirements than either of the other two business entities. Another advantage of the corporate structure is that capital can be raised by the selling of stock, which is not true of sole proprietorships or partnerships.