Normally, the first concern that surfaces in the initial days of your startup is the way you should operate your business for success. Whether you want to register it as a sole proprietor, a partnership, a trust or a limited liability company is the question that seems to bother a legion of entrepreneurial brothers out there. Determining the structure of your business is of chief importance and can impact your tax planning and legal obligations. It is certainly advantageous to structure your business in the early phase of business. Many business owners realize that their business could be switched to another form or structure in the future. The main objective behind restructuring is to simplify growth and accommodate business-level strategies during various periods of your business life-cycle. Before registering your business you should know answers of the following questions: how to get a Federal Tax ID? Who is liable for the business’s obligations? How and when can the business be restructured? Here are a few business entity types to consider before choosing the aptest structure for your business.
Operated by a single individual, the business is not a separate entity. This type of structure has unlimited liability – the owner has to pay the liabilities and debts of the business from his personal income in case of default or bankruptcy. The profits and losses are accounted for the owner’s personal income tax returns.
This type of structure is where one or more partners share the profits and losses of the business. The maximum limit of partners is twenty. All the benefits are equally shared by the partners so much so that each partner has to file taxes on their income or share of profit(s). The unlimited liability of this structure is retained by the partners in the ratios of their investments.
This type of structure is most common with trusts and not-for-profit organizations. An agreement between the stakeholders is reached in collaboration toward a cause. The registration of this entity is not mandatory and the paperwork is limited to bona fide agreements across the board. The members or stakeholders are individually obligated to their debts and contracts. There is no concept of unlimited liability.
Limited Liability Partnership (LLP)
It can usually be set up with two or more members but the business is classified as a separate legal entity in this structure. Similar to partnerships, each member shares the profit and pays taxes on their share of profit. The catch is that the owners/partners do not retain the liability of the debts of the business in case of failure in payments. This form of entity is gaining traction in the small business community.
Limited Liability Company (LLC)
Growing in popularity, this business type offers relaxations and benefits in the operations. You can now access the benefits associated with close corporations and partnerships only in this type of structure. The ultimate advantage of this type of structuring is the perpetuity in the life of business even if shareholders keep changing.
There are three factors to consider in choosing the right structure of business – taxation, liability, and flexibility.
Deciding on the type of business and registering it are mounting tasks in unanticipated ways, therefore there are no hard and fast rules regarding the functionality of the entity type or structure. Always ensure that you go through proper consultation and advice before forming your business.