Choose a business structure

 

The simplest business structures

The two simplest structures are a sole proprietorship or a general partnership. Simpler as you will see below is not necessarily better.

  • Sole Proprietorship

For a sole proprietorship, in the United States, check with your county government or state to obtain the details of registration. For a low risk business, where your advice or work is not likely to have substantial liability this may be just the structure for you. It is best to check with a lawyer. As a sole proprietor, there is no difference between your personal liability and that of your business.

 

  • General Partnership

You could form a general partnership with a colleague who has complementary or similar skills. If the demand for your services is more than you can handle, having a partner could be an attractive option. The rate at which work comes in may be uneven, and your partner could step in when you are too busy. You may even like to go on vacation without having to say no to new projects, or working through your “time off.” Looks good, doesn’t it? The problem, though, with general partnerships is liability.  Because there is no difference between you, your partner or your business, it is even worse than a sole proprietorship.

Better business structures

Get advice from a lawyer and an accountant sooner rather than later. An accountant can give important advice about your taxes, and whether whether a limited partnership (LP), a limited liability company (LLC), or a corporation may be best.

 

  • Limited Partnership

A limited partnership has two types of partners, general partners and limited partners.

 

The general partners are responsible for managing the organization, and can make obligations on behalf of the partnership. General partners are also liable for the partnerships actions and obligations.

 

Limited partners are liable to the extent of the money that they put into the organization, provided that they are not actively involved in the affairs of the partnership.

 

To avoid liability problems, the limited partnership can have a corporation or LLC as general partners. Forming a limited partnership that provides good liability protection is more complicated than forming either an LLC or a corporation.

 

The LLC tends to be favored in the real estate business and is not allowed for certain organizations, such as banks.  Many consultants use the LLC, because it is easier to run than a corporation. The LLC has less burdensome regulatory requirements and more flexibility.

 

  • Corporations

 

 

There are two types of corporations, C or S corporations.

 

The individuals in a C corporation are taxed on their own income and the corporation is also taxed resulting in double taxation.

 

For S corporations, there is a pass through tax. The tax passes through to the owners resulting in single taxation. The profits and losses of the S corporation would be paid on your personal income tax.

 

Unlike sole proprietorships or partnerships, the LLC, C corporations, and S corporations have good liability protection. But you have to carefully follow the regulations, including annual meetings and careful separation of your personal finances to avoid losing your liability protection.

 

For more information to help you decide about the best business structure for you, excellent information is available on the Internal Revenue Service and US Small Business Administration websites.

Next...