The most common forms of business are sole proprietorship, partnership, corporation and S corporation. A more recent development to these forms of business is the limited liability company LLC and the limited liability partnership LLP. Because each business form comes with different tax consequences, you will want to make your selection wisely and choose the structure that most closely matches your business's needs. If you decide to start your business as a sole proprietorship but later decide to take on partners, you can reorganize as a partnership or other entity.
If you do this, be sure you notify the IRS as well as your state tax agency. Sole Proprietorship The simplest structure is the sole proprietorship, which usually involves just one individual who owns and operates the enterprise. If you intend to work alone, this structure may be the way to go. The tax aspects of a sole proprietorship are appealing because the expenses and your income from the business are included on your personal income tax return, Form Your profits and losses are recorded on a form called Schedule C, which is filed with your The "bottom-line amount" from Schedule C is then transferred to your personal tax return.
This is especially attractive because business losses you suffer may offset the income you have earned from your other sources. As a sole proprietor, you must also file a Schedule SE with Form You use Schedule SE to calculate how much self-employment tax you owe. The federal government permits you to pay estimated taxes in four equal amounts throughout the year on the 15th of April, June, September and January.
With a sole proprietorship, your business earnings are taxed only once, unlike other business structures. Another big plus is that you will have complete control over your business--you make all the decisions. There are a few disadvantages to consider, however. Selecting the sole proprietorship business structure means you are personally responsible for your company's liabilities.
As a result, you are placing your assets at risk, and they could be seized to satisfy a business debt or a legal claim filed against you.
Raising money for a sole proprietorship can also be difficult. Banks and other financing sources may be reluctant to make business loans to sole proprietorships.
In most cases, you will have to depend on your financing sources, such as savings, home equity or family loans. Partnership If your business will be owned and operated by several individuals, you'll want to take a look at structuring your business as a partnership. Partnerships come in two varieties: general partnerships and limited partnerships. In a general partnership, the partners manage the company and assume responsibility for the partnership's debts and other obligations.
A limited partnership has both general and limited partners. The general partners own and operate the business and assume liability for the partnership, while the limited partners serve as investors only; they have no control over the company and are not subject to the same liabilities as the general partners.
Unless you expect to have many passive investors, limited partnerships are generally not the best choice for a new business because of all the required filings and administrative complexities. If you have two or more partners who want to be actively involved, a general partnership would be much easier to form. A corporation consists of shareholders, a board of directors, and officers. The Roles in a Corporation In order to understand the structure of a corporation, you should familiarize yourself with the different corporate roles and how they work together.
As explained in more detail below, the owners and managers of a corporation fall into one of the following categories: Shareholders: The shareholders are the owners of the business. Board of directors: The board is responsible for the overall management of the corporation. Officers: Officers handle the day-to-day affairs of the business. Employees: All others who work for the business are employees.
Corporations are not required to have employees though they must have shareholders, officers, and directors. Shareholders The shareholders have invested money into the business and are owners of the company.
The Board of Directors The shareholders elect a board of directors, which is a group of people responsible for oversight and financial decision-making for the corporation. Corporate Officers and Employees While the board is responsible for the overall direction of the company, the board appoints officers to handle the day-to-day operations.
Secretary: The secretary is responsible for maintaining corporate records and takes minutes at shareholder meetings. The Role of Bylaws and Your Corporate Structure Bylaws are the internal rules for how you will run and manage your organization. Consequences of Failing to Follow Corporate Structure One of the main reasons to form a corporation is to protect the directors' and shareholders' personal assets from the liabilities and debts of the business.
Business Formation. Choosing a Business Structure. Sole Proprietorships. Members and managers can take part in business operations. These businesses don't run indefinitely. Some have a limited life or end when a member retires, leaves, or dies. To create an LLC , owners must file articles of organization and an operating agreement with the Secretary of State.
Rules for LLCs are different in each state, so owners should prepare for this if plan to operate do business in more than one state. Corporations exist separately from their owners.
They must follow many rules and state laws. Corporate assets are separate from the owners' assets. Owners are not responsible for business debts or judgments.
Corporations can be private, public, or municipal. They may operate indefinitely. They can keep some profits without being taxed, and they can raise money by selling stock.
Corporations are often taxed twice: once on the business side and once on the shareholder's side. Some companies get around this by paying salaries instead of dividends. This is ideal for small business owners. S-corps offer personal liability protection. They allow owners to report profits and losses on their personal tax returns.
S-corp owners can use simple cash-based accounting. They can have up to shareholders and one kind of stock. However, it is highly suggested that a company's CEO should not also be the company's chair to ensure the chair's independence and clear lines of authority. The COO is often referred to as a senior vice president. Chief Financial Officer CFO : Also reporting directly to the CEO, the CFO is responsible for analyzing and reviewing financial data, reporting financial performance, preparing budgets, and monitoring expenditures and costs.
The CFO is required to present this information to the board of directors at regular intervals and provide it to shareholders and regulatory bodies such as the Securities and Exchange Commission SEC.
Also usually referred to as a senior vice president, the CFO routinely checks the corporation's financial health and integrity. Together, management and the board of directors have the ultimate goal of maximizing shareholder value. In theory, management looks after the day-to-day operations, and the board ensures that shareholders are adequately represented.
But the reality is that many boards include members of the management team. When you are researching a company, it's always a good idea to see if there is a good balance between internal and external board members.
Other good signs are the separation of CEO and chair roles and a variety of professional expertise on the board from accountants, lawyers and executives. This does not necessarily signal that a company is a bad investment, but as a shareholder, you should question whether such a corporate structure is in your best interests. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance.
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