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Selecting your small business structure

architect36832024.jpgWhen it comes to determining your business structure, there are several things you need to consider. One of the most important things you need to consider is your liability to the business. A business owner should protect themselves from any liability associated with the business this includes things like tax implications, capital needs, and what happens to the business in the event of your death. Here is a list of the to 5 business structures that are commonly used by small business owners:

Corporation
A corporation typically refers to large businesses. These types of businesses are run by a single person or a group of individuals. There are 3 main types of corporations:
1. Close corporation. A closed corporation will issue stock but they usually limit the amount of shareholders they have. The transfer and sale of stock is controlled by the company at the board-level.
2. C Corporation. A C Corporation is the most common type of corporation. The C Corporation allows stock to be purchased in unlimited amounts. The board of directors makes all the decisions pertaining to the business.
3. S Corporations. An S Corporation has a different tax status with the IRS. They have the option of issuing stock to the public.
Many small businesses choose to become corporations because it protects them in the event of bankruptcy or litigation. The other benefit of a corporation is that the company will go on after you pass away.

Nonprofit Corporation

A Nonprofit corporation is quite different from a Corporation and other businesses. Nonprofit corporations tend to be in business for an ideal or goal. Usually a nonprofit corporation serves the public interest or political interest. They have tax-exempt status under certain conditions and are used to benefit the country. Nonprofits will support themselves with donations and other assistance. Most Nonprofits will rely on employees and others that are willing to work as volunteers. These individuals must believe in the cause and have enough money to support themselves while they work for the Nonprofit.

Limited Liability Company (LLC)

Another business structure is a limited liability company or LLC. LLCs are great for home-based businesses that want to be free from legal implications if the business must dissolve. Unlike corporations, an LLC does not need to hold annual meetings and follow some of the same regulations. An LLC must have at least one or two individuals that are running the company. Usually they are run as partnerships consisting of members, managers, and employees. An LLC must file an Annual Report and follow their state requirements in order to remain in business.

Sole Proprietorship

For the home-based business owner, a sole proprietorship is the cheapest option. Normally you do not need to purchase a lot of supplies (which normally come from your personal savings account) and you don't need to pay anything to file your business structure with your state. The downside to a sole proprietorship is that you are 100% responsible for anything that happens to your business. A sole proprietorship must only have one owner and the business name is normally the same as the owner's name. All of the profits from the business are directly given to the owners. The bad part about this is that you are responsible for any debts and you can be fined by the IRS if you do not pay quarterly taxes.

Partnership
Another common business structure is a partnership. This is when you have 2 or more individuals that enter into a legal agreement to do business together. Partnerships are created upon loyalty and trust to the other individual, as they are responsible for the success or failure of the business. Partnerships operate similar to a sole proprietorship. The owners are liability for the business if it fails, this means their personal assets are at risk. The partners must report income losses or gains on their individual tax returns because the partnership does not pay income taxes. Like a sole proprietorship, the company cannot be sued, but the individuals can be sued.

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