Every business needs a skeleton, a backbone, a framework that gives structure and organization to the operation.
Having a structure also allows you protections and rights under the law and qualifies your business for particular tax and income advantages.
The structure you choose is important. The decision you make will affect your financial, operational, and legal standing and reporting. It will also create some responsibilities and requirements for reporting that may force you to seek outside help or assistance.
Here are some pointers on each alternative:
Sole proprietorship. The business owner and his venture are one and the same. This is usually the simplest form of business, the easiest to administer and best suited to the solo operator that intends to continue to "go it alone." The expenses you incur and the income your business generates are simply included on your personal tax return. You will complete a Schedule C then transfer the totals to your personal return. If you want maximum control over every aspect of your business, this may be the best choice for you. The downside is that you will be personally liable for all your business debts, liabilities, and any legal actions against the business and you will be putting your family's assets at risk.
Partnership. If you have more than one owner of the business, a partnership may be the best choice. A general partnership is one where the partners share in the management of the business. They also share the obligations, profits, and responsibilities in pre-defined roles and functions. In a limited partnership, the general partner(s) administers the business and assumes the liabilities while the limited partners agree to a reduced role, usually that of being the investor. The limited partner is protected from the liabilities and debts of the company but has no control over decisions and operations. Partnerships trigger increased reporting and more complex tax consequences. Usually the partners claim the business profits on their own individual tax returns.
Corporation. Think of a business corporation as a totally separate and distinct body or entity. It has its own legal standing, ability to take on debt, ability to raise capital, and can retain its profits. The advantage to the owner is that his personal assets are completely separate from the corporation and he does not share in the corporation's liabilities. Such a structure requires additional expense, reporting, and usually a more complex accounting system. The disadvantages of corporations include, as we stated, increased expense, increased complexity in tax preparation and accounting, having to deal with shareholders (may or may not become an issue), the likelihood you'll need professional legal assistance, and in some cases the owner will be paying double taxes on business earnings.
Be aware that there are several variations on the standard corporation including Subchapter S corporations, non-profit corps and Limited Liability Companies (LLCs) which are a hybrid with some of the features of both corporations and partnerships.
I am not a professional in such matters and suggest you spend some time studying the alternatives. If you need help, first contact the IRS and ask for their literature.
If you decide on a corporation structure, you may want to speak with an attorney. Another option would be to go online and hire a professional service firm that will help you through the process of getting set up.
My Corporation.com is one such service that I have used in limited applications and they have done a good job.
I hope this very cursory survey will at least raise some appropriate questions in your mind that will cause you to do your own research and find the business structure that suites your particular situation.
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