Small Business Start-Up Advice: Different Types of Business Structures

A sole propriertorship is the simplest to set up, but is only a viable option if you are the only owner of the company. With a sole proprietorship, you simply operate as yourself. You are self employed.

In a general partnership, an operating agreement is written that states the responsibilities of the partners and how the business will operate. A new partner can not join the company without the agreement of all partners already involved, although it can be agreed in the operating agreement that it only takes a certain percentage of partner agreement. Laws vary by state, but in many states the business is dissolved if one partner leaves or dies unless it is clearly stated in the operating agreement what will happen.

In a limited liabilty Company, a form has to be registered with your state to be recognized as a limited liability company, and articles of organization should be written and signed by the members that designate how the business will operate and how profits, responsibilities, and losses will be shared amongst the members.

With a corporation, Articles of incorporation must be set up to determine the mission and bylaws of the company.

Liability

As a sole proprietorship, you are currently holding all the liability. If there were a lawsuit against your business or if you incurred debt, you would be personally responsible. This means that a judgment can be made against you and your house, car and other personal property is at risk.

With a general partnership, you retain liability. Your personal assets are at risk. Another downfall is that all partners are responsible for the actions of any partner. If one partner signs a contract or injurs someone, all partners are personally responsible.

With a Limited Liability Corporation or corporation, your personal assets are also protected and your business is seen as a seperate entity if an employee injurs someone. However, if the owner personally injurs someone, they are personally liable for it. As owner, if you personally guarantee a loan for the business, you will be personally liable for the loan as well.

With any business structure, liability insurance can help protect you from risks.

Tax Preparation and Payment

With a sole proprietorship, all taxes for the business are reported on your personal taxes, even if you have not paid any of the company money out towards yourself. With a sole proprietorship, you may be able to use losses from the business to offset your personal income, even if it is drawn from other sources.

With a general partnership, the company does not have to pay taxes, but does have to file an informational form telling the government how much the company made and what profits and losses belong to which partners. The taxes are paid by the individual partners on their tax returns. Fringe benefits, deductions and expenses are handled in the same way as a sole proprietorship.

With a Limited Liability Corporation, you can report the taxes seperately or you may pass them through to your personal taxes. One benefit of the Limited Liability Company is that there is no set way to divide up profits and losses, which means you can divide assets, profits, losses amongst your members however you choose.

With a corporation, your company's taxes are reported seperately from your personal taxes and responsibility is divided up amongst your partners if the corporation is set up as a "C" corporation. An S corporation allows members to have the limited liability protection, but taxes are reported on personal tax returns. With an S coporation you can only claim losses up to the amount of money you put into the company.

With both a Limited Liability Corporation and a corporation, you will not be personally responsible for taxes unless you have received dividend or payments from the company. With these business structures you can also receive lower tax rates on retained earnings that the company decides to hold onto at the end of the year, than if it were on your personal taxes.

Another benefit of forming an LLC or corporation is that you can use medical expenses as a business deduction. As a sole proprietorship, there is a limit as to how much you can deduct for medical expenses, (although you can deduct premiums) where as with one of the other structures, you can have your business pay for your family's medical expenses and use them as a tax deduction.

Control

As a sole proprietorship, you are in charge of all decisions with the business.

With a general partnership, all partners have decision making rights and other partners are obligated to abide by anything one of the individual partners choose to sign on.

With a Limited Liability Company, you can arrange for the company to be member managed or manager managed. If it is member managed, you will have to hold meetings to vote on decisions for the business, but if it is manager managed, you can make decisions for the business without consulting or needing approval from your other members.

With a corporation, officers are chosen and appointed and they vote when decisions are made for the company, although it is possible to arrange it so that director's meetings can be held by telephone or written permission from members may be sufficient instead of actual votes.

Convenience and Burden

The sole proprietorship is the simplest to set up, requiring you to file forms you need to for business liscenses. If you want to operate under a different name, you will need to file a "doing business as" at the county clerk's office, so people will know who the owner of the business is.

A general partnership does not require a partnership agreement, as oral agreements are legal, but it is best to have one in writing. The company will also have to file for any business liscenses they may need. Individual partners will have to file taxes and the company will have to file the informational form. It can also be seen as a burden that you will be obligated to fulfill any responsibilities your partners take on, whether you agree with them or not.

With a limited liability corporation, you have to register your LLC with the state and also form articles of organization. The partners will all have to file individually at tax time, and you'll need to file for any liscenses the business will need.

With a corporation, you will have to file specific articles of incorporation and determine what types of stocks you will be issuing. You will have to hold director's meetings and prepare reports to let shareholders know what is going on with the business. The company will have to file taxes as an entity and shareholders will have to file taxes when they receive dividends.