If you’re starting or currently run a business, one of the most important decisions you’ll need to make is the type of business structure you’ll adopt. Each comes with profound implications for your taxes, record-keeping requirements, and personal liability. When it comes to your taxes though, this is something which you should make sure is all sorted, so that you won’t have an issue with it in the future. Involving a tax lawyer can help you avoid any complications that come with things like sales tax for example. So if you don’t have one yet, then you need to get it sorted as soon as possible.
The choice very much depends on what your current business circumstances and business strategies are. If you’re involved in a start-up and generating small business ideas, a sole proprietor structure may well be all you’ll need. If, however, you run a larger company and plan to issue stock down the road, you need to look carefully at the corporate structure.
Be sure to investigate the pros and cons of each thoroughly. It’s a good idea to talk to at least several advisors before making any final decision.
Here are the four major types of business structures.
1) A sole proprietorship provides the owner with undisputed managerial control. The formation of a sole proprietorship is simple. These qualities make the sole proprietorship the most frequently used business structure in the U.S. It does have one drawback, however. The proprietor is personally liabilities for any financial obligations the business incurs.
2) A partnership can be made between at least two people (and can be more). Partners strike an agreement to share in any profits or losses. Pros include a “pass-through” of profits and losses for tax purposes. The partnership does not have to pay taxes on profits. (By the same token, does not benefit from tax implications of any losses.) Business gains and losses are passed through to the individual tax returns of the partners. Like the sole proprietorship, however, partners are held personally responsible for any financial obligations incurred by the partnership’s business. If you are a partnership based in Canada, and you forget to file your taxes or do them incorrectly, the CRA Collections will be in contact and may seize your possessions and your bank account, so make sure you are doing your taxes above board and accurately. If you find yourself in trouble with the CRA regarding your taxes, it might be a good idea to invest in a tax lawyer like Rotfleisch & Samulovitch to overcome these issues.
3) A corporation is formed via legal methods. Its formation creates a legal entity that does business separate from the individuals who are part of it. In many ways, the corporate entity is like a person. It pays taxes and is legally liable for financial obligations and other actions. It can make a profit. The chief benefit is that individual liability on the part of the owners is avoided. It also sets the stage for any future stock offering.
There are several drawbacks to forming a corporation, however. The first is that forming one requires legal expenses and extensive record-keeping. Each business is incorporated in a particular state and you will need a lawyer from somewhere like the maryland business law firm who is experienced in corporate formation.
There is also a potential double tax. Your company will pay state and U.S. taxes on its earnings, and shareholders, if any, also need to pay taxes on any dividends.
The two levels of tax can be avoided by distributing profits as salaries to any corporate shareholders (including yourself).
Another method of avoiding double taxation is to form a Subchapter S corporation. (A regular corporation is referred to as a C corporation.) S corporations treat taxes somewhat like partnerships. Any profit or loss can be passed through to individual tax returns.
You can reap the benefits of both partnership and corporate structures by forming a limited liability company (LLC). Owners are exempt from personal liability in this structure. Any profits and losses are allowed to be passed through without incurring business tax.
Because of the associated legal and tax implications, it is important to give careful consideration before choosing a business structure.