Business structuring begins with the initial concept or idea for your business—the kernel or nugget of creation. It is well known that many businesses fail, but how you structure your business and legally protect your assets may make all the difference to drive success. It is important that as a business owner you identify what sets you apart from the others? A sound understanding of business models and entity structures. And of course ingenuity and hard work. If you involve others in your creation, you are effectively entering a marriage—together with all of the associated benefits and detriments.
The business entity you choose affects your bottom line in taxes as well as treatment of liability issues. It will affect required paperwork, simplicity of operation, and future relations with your customers.
The most common business entity is Sole Proprietorship. The child on the roadside with the lemonade stand is a sole proprietor. Business is cash basis, and there is little thought for tax consequences and liability. Insurance may provide liability protection.
Profits and losses are reconciled on Form 1040 through financial analysis on Schedule C. Here losses may offset any income in coming to your bottom line. All decisions are up to the business owner. But then, so are the financing options.
There are two basic forms of Partnerships: 1) General Partnerships; and 2) Limited Partnerships. General partnerships, of course, deal with shared management and responsibility of the partners.
LIMITED PARTNERSHIPS involve a structure where decision makers share general liability, while the limited partners are shielded from liabilities and decision making. This structure is recognized in two basic sub-forms: 1) Limited Liability Partnerships; and 2) Limited Liability Companies.
Both of these limited liability structures have pass through tax structures. The two limited liability structures can be set up in such a way as to determine control. There are subtle nuances in the way the two act. Limited Liability Companies seem to be the dominant arrangement for small businesses these days.
Corporate structures are more complex and more expensive than other forms of business. The focus is on personal asset protection and limited risk. Some of the benefits of corporate structures are: 1) limited risk; 2) tax benefits; 3) different classes of ownership; 4) indefinite life. Keep in mind that a corporation is a “legal fiction.” In other words, it is treated as an individual in many respects.
Disadvantages may included double taxation and complex structures.
Owners of small businesses may want to set up an S CORPORATION, which gets its name from the US Tax Code. This is nothing more than an arrangement whereby the corporation is given tax treatment as a pass through entity, much as with a sole proprietorship. Of course there are certain drawbacks and benefits.
Please contact us at Daniel R. Robison, P.C., so that we can help you in these important business decisions. Our staff has successfully helped many businesses launch their ideas in going concerns. We have also helped many businesses dissolve, while retaining the maximum number of assets and value possible. Working both sides of the coin give this law firm a unique perspective on what make a successful operation work.