Starting a business today is easier than ever. With the help of the Internet, anyone can create their own business and start providing various services. As a business owner, one of the first decisions you make is determining the legal structure you want to base your company on.
This is an extremely important decision as it can determine the success of your business. So, in this article, we will discuss the details of four common legal business structures to determine which one is best for your business.
Denial of responsibility: This article is not legal advice; you should consult professional legal guidance to make the right decision. The purpose of this article is to learn about the various legal structures and, depending on your situation, what long-term impact they can have on your company.
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4 types of legal structures for business:
There are several things to consider before choosing the right legal business structure. Each structure has its pros and cons. As a business owner, you should choose the one that best suits your needs.
1. Individual enterprise
First on our list is IP. A type of business wholly owned and operated by an individual. Sole proprietors have no legal distinction between the owner and the business itself. Because there are no legal obligations, this is one of the most popular business structures and possibly the easiest to set up.
Taxation: For simplicity, self-employed individuals do not have to file a tax return. Instead, the owner is responsible for all taxes and will include the details on their tax return via Schedule C Act (Form 1040).
Duty: The individual owner of a private enterprise is personally liable for all business debts. This is extremely risky as the sole proprietor must pay all business expenses if the company cannot fund its own funds.
2. General partnership
The general partnership business structure is worth checking out if you have multiple partners in the business. General partnerships are easy to set up, but a partnership agreement may need to be completed and submitted to the authorities.
Taxes: The partnership is not required to pay federal income tax, but it must file an annual information return (Form 1065) with the IRS to disclose operating income and losses. Based on the owners’ profit sharing quotas specified in the Partnership Agreement, profits and losses are then shared between them. Each partner pays taxes on their share of the profits or losses they incur.
Duty: Like a sole proprietorship, a general partnership also requires the owners to pay full business expenses.
3. Limited Liability Company (LLC)
Limited Liability Company, LLCis by far the most popular business structure in 2022. You can think of an LLC as a hybrid of a general partnership and a sole proprietorship. So it brings you the best of both worlds. LLC includes a simple setup. Anyone who follows you will be able to quickly get to work.
Taxation: Taxes are paid as “through legal entities”. Thus, the income from the business is distributed to the members of the LLC, who then declare their respective shares of the profit or loss on their personal income tax returns. Like a general partnership, a limited company must file an informative tax return with the Internal Revenue Service (IRS).
The tax rate also depends on which state you set up your LLC in. For example, setting LLC in Ohio will be more expensive (due to 15.3% tax) than in Delaware where you pay a fixed $300 per year.
Duty: The LLC protects members from personal liability for the debts and claims of the company. Only the business’ own assets are at risk if the limited liability company is sued or in debt. Therefore, your personal assets are protected.
Note. In the event of fraud or illegal activity, creditors are not allowed access to the personal assets of LLC members. Limited liability companies also have to follow certain government regulations, which you can learn more about, Press here.
4. Corporations
The most complex type of organizational and legal form of a company is a corporation. A business owned or operated by shareholders. But by law it exists as a separate, independent entity.
A company may have obligations that are independent of the obligations of the owners, but all of its members still have obligations, for example, to pay taxes. In general, corporations are better suited to larger, more established businesses with multiple employees.
Taxation: There are two types of corporations: C-Corp and S-Corp. Both have different tax policies, and while C-corp exists as a separate company and must pay its own taxes, S-Corp is different and passes on corporate income or losses through shareholders for federal tax purposes.
Duty: The corporation has a type of liability often referred to as “immortal”. This is because corporate liability will not disappear even if you die. Although owners are protected by different laws, such people cannot lose more money than they have invested in the company.
