One of the first decisions that you'll need to make when starting a business is the way in which you'll set it up. How you'll structure your business is very important, and it will have a direct bearing on the laws your business must adhere to, how you'll take your profits from the operation, and a number of other critical factors. Some entity choices are listed here:
- Sole Proprietorship – This is the choice of most small or home businesses. In a sole proprietorship, the owner is the person who is most responsible for the running of the company. He or she makes executive decisions, buys supplies, and pays expenses. All of the money that flows into the business goes straight to that person.
The advantages of a business like this are that you do not have to split the profits. The owner decides what to do with the profits. On the other hand, the owner is also responsible for all debts incurred by the company.
- Partnership – You now have someone to share the load. A partnership business is one that is operated by two or more individuals. They equally share the responsibility of running the company. When the company is created, the partners have to come to an agreement about handling everything from executive decisions to dissolving the partnership.
The advantage of a partnership is that there are two heads to come up with solutions to problems and pool resources for raising capital. A major disadvantage is that you also have to share the profits.
- Corporation – A corporation is a company that is regulated by state and federal agencies. The procedures for incorporation are more complicated than for a sole proprietorship or a partnership. A corporation is run by the shareholders in the company. A board of directors makes the major decisions on behalf of the shareholders.
The advantage of a corporation is that no one person is responsible. Benefits paid for employees can be deducted and funds can be raised by selling stocks instead of seeking a loan. On the flip side, corporations can be sued and taxed heavily. The corporation paperwork is lengthy and you have more eyes watching your every move.
- S Corporation – This type of corporation is still set up in much the same manner as the regular corporation listed above. However, the S corporation's main benefit is that shareholders can claim their earnings from the company as distributions, like those made from stocks in the market. If the shareholder also works for the company, they have to pay themselves from the earnings and their share of the profit. This amount is taxed by the government. Shareholders who try to claim the entire amount can be held liable by the government and have to pay taxes on the entire amount of money instead of a portion.
- Limited Liability Company – A Limited Liability Company, or LLC, has features of both a corporation and a partnership. There is more than one owner, so in that respect it is a partnership. From the corporation standpoint, the partners have limited liability like shareholders do in a corporation. An LLC can be dissolved by a majority vote of the owners. An advantage is that the company is taxed like a partnership.
