Choosing Forms of Business Ownership
To keep your business viable, you must choose a structure that best serves your needs.
Starting your own business can be daunting without the experience of creating a plan. To dream big, you must find your vision and identify social and financial issues that affect customers. You can come up with several ideas and bring them to life by defining a set of reliable, detailed goals. It's also important to factor in the math so you can establish priorities, dividing your goals by month or year to create a feasible path for your business. Ideas are important, but so is structure. To keep your business viable, you must choose a structure that best serves your needs.
Making the Right Choice
One of the steps to start a business is choosing a legal structure. Your choice will affect the amount of taxes you owe, the paperwork you're required to complete, personal liability and day-to-day operations, especially in accounting. Schedule an appointment with a business consultant and they will review the benefits and drawbacks of each entity. They will help you make an informed decision you won't regret later. Businesses must adapt to survive, so you might see changes emerge that render your current structure obsolete. Changing your structure can provide you access to opportunities you wouldn't be able to experiment with otherwise. You must consider your specific needs before choosing a business structure.
Most small businesses are sole proprietorships. It is the least expensive and quickest way to start a business. As the individual owner, you control all capital and assets. This gives you full control over what services they develop and provide to customers. You are also responsible for any decision your employees make. Sole proprietorships cannot function as a separate taxable entity, which means there is no difference between personal and business income. You'll have to pay debts and liabilities held against your business from your personal savings account. Since you're not an employee, you'll have to pay the self-employment tax every three months if you make over $400. This is 15.3% of your gross income with 12.4% for Social Security and 2.9% for Medicare. You can use the Schedule SE to calculate how much you owe from this tax. It is difficult for sole proprietorships to raise money, as banks are often hesitant to give loans since some small businesses have inconsistent cash flow. Assuming full responsibility can allow greater creative freedom, which means you're fully responsible for all business activity.
Group projects could inspire you to start a business. A partnership involves two or more individuals and is easy to start. Under a general partnership, each person owns a specific percentage in shares. Owners should create a partnership agreement that specifies the responsibilities of each partner, establish a set amount for investment and define the agreement's duration. Organizing each partner's role provides clarity as to how a business develops and allows them to maximize their strengths that could contribute to future success. Each person is equally liable for debts and must cover for business losses, so it is important to choose partners that are trustworthy and proficient in managing money. Under a limited partnership, partners have little say over how a business operates and don't control assets. They typically act as investors or consultants instead. Partners complete a Schedule K1 to report their earnings, losses and deductions. They must also report their earnings on their personal tax returns, but don't have to pay income tax. General partnerships are more optimal for new businesses than limited partnerships, which depend on shareholding experience.
Corporations are more complex and expensive to form. Before starting a corporation, you must sign a document called articles of incorporation and submit the name and purpose of your business to the government. Some states require you to list the names and addresses of directors and officers who will help plan and manage day-to-day operations. Upon completion, the state secretary will give you a certificate that gives you legal authority as the corporation's stockholder. You must determine when stockholders will hold meetings to discuss company policy and current initiatives, which require an abundance of resources employees are typically responsible for handling. Corporations can last for centuries and could last even longer unless they declare bankruptcy or merge with another organization. They are recognized as a separate legal entity and establish their own accounting system. It becomes easier to raise money with a greater ability to transfer shares, which can be used to claim ownership of property or other assets purchased by the corporation. Multiple ownership is more feasible than sole ownership since there are many meetings and other group initiatives to manage. Additionally, corporations must pay substantial state and federal income tax. They are subject to double tax, deducting from profits and dividends. Unless you have hundreds of thousands of dollars, it is not advisable to start a corporation.
You could transition into a S corporation. The process is simple and quick, since only filing Form 2553 is required. Under S corporations, taxes from shareholders are collected from individual income. S corporations cannot have over 100 shareholders, but promise a lower tax rate overall. S corporations allow shareholders to allocate profits, depending on the amount of shares they own. Typical corporations are required to accumulate all profits and losses.
Legal Limited Company
Legal limited companies are a hybrid structure that combines the benefits of partnerships and corporations. Unlike in a limited partnership or S corporation, business owners have more autonomy over the decisions they make. They avoid the double taxation of corporations and provide limited liability, protecting your personal accounts from business expenses. Their layout and organization are similar to corporations and they also require articles of incorporation. However, LLCs don't allow shares. Owners must pay self-employment tax, which is deducted from gross income. They still offer several deductions you can take advantage of to save cost.
Choosing the right business structure depends on tax and legal considerations, which you must think about to keep your business afloat. You don't want to incur more expenses for tax advantages you cannot afford. Your decision should be based on integrity and your willingness to experiment with different future possibilities. It's ideal to imagine how your business could succeed upon knowing you made the right decision.