Common Business Structure Filing Options
Pros and cons of different types of business structures
If you are looking to start a business, the type of structure you choose will influence more than just your day-to-day operation, as it also affects the risks that are associated with your personal assets and your tax filing status. Your ultimate goal should be to choose a business structure that gives you a balance of the most comprehensive legal protection and tax or financial benefits.
Where you register your business might impact your overall filing decision, as there may be different restrictions depending on your location. This can complicate tax matters or otherwise if you ever choose to convert to a different business structure down the road. Always consulting an attorney, accountant, or business counselor can help you make this decision. You will be advised of the several structure options available and how they would impact your operations. The business structure will also determine with the paperwork you need to file with the state, how much money you are able to raise, and your own personal liability risks. To help you know what terms you might be exposed to during your filing decision, here are the most relevant types of corporations.
It is easy to form a sole proprietorship, and it is beneficial because you are in complete control of the business. Even if you have already been performing business duties and activities but haven’t registered, you are automatically considered a sole proprietorship. This form doesn’t produce a stand-alone business entity, there for all your business liabilities and assets are tied up with your personal assets and liability. Any debts or obligations that have been attached to the business are your personal responsibility. You can get a trade name as a sole proprietorship, but you can’t sell stock and raise money. Banks also tend to be more resistant to lending to these structures because of the personal liability factors.
If your business is owned by two or more individuals, a partnership is the simplest business structure to adopt. You can either form a limited partnership (LP) or a limited liability partnership (LLP). With a limited partnership, there is usually only one of the partners that carry unlimited liability, while all of the others maintain limited liability. This means they also have more limited control regarding the company, often indicated and document through the partnership agreement. The partner who holds unlimited liability must pay self-employment taxes, and the profits from the company are passed on to personal tax returns for all partners. With limited liability, each partner or owner will be granted limited liability. This keeps the debts from the company falling onto all the members and freeing any partner from the responsibility of the actions of the other partners.
There are several types of corporations that can be filed, but to form an S corp, your sole purpose is to avoid some of the tax drawbacks of filing as regular C corp. The profits and losses can be passed onto the owner’s personal income without being subject to corporate tax rates. The tax requirements on an S corp vary by state location, but usually, they copy the federal government and tax the shareholders. To secure S corp status, an application must be filed with the IRS, which is different from registering directly with the state. There are some restrictions on this business structure, which typically include those areas a C corp is subject to honor.
Businesses organized for the purpose of education, charity, literary, scientific, or religious work are usually filed as nonprofits. Since their services are beneficial to the public, these organizations can receive tax-exempt status. They pay neither state or federal income tax on any of their profit. They must file and be accepted by the IRS for the status to be conferred.
There are certain advantages and disadvantages to each business structure, so don’t just jump into one that sounds reasonable. It is highly advised that you check with a lawyer or accountant before sending in your filing application.