Registering a Company: Choosing a Business Structure Forms of Business Ownership
      
One inevitable decision that you will have to make as a business owner is how the company should be structured. In the USA, these are the most common forms of business structure:

• Sole Proprietorships • Partnerships

• Corporations


• S-Corporation

• Limited Liability Company (LLC) Sole Proprietorships

The majority of small businesses start out as sole proprietorships. These firms are owned by one person, usually the individual who is running the business on a day-to-day basis. These sole owner own all the assets of the business and receive all the profits generated by it. They inevitably assume complete responsibility for any of its liabilities or debts. 

What are the Advantages of a Sole Proprietorship?

• It is the easiest and least expensive type of ownership.
• Sole owners are in complete control of their business, and they make decisions as they see fit. They do not need to seek approval for anyone else so they are flexible and they can act fast. 
• Sole owners receive all income generated by the business and it is completely up to them to  keep the income or reinvest it.
• Profits from the business flow directly to the owner's personal tax return.
• The business is easy to dissolve, if desired.

      
What are the Disadvantages of a Sole Proprietorship?

• Sole owners bear unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk.
• May be at a disadvantage in raising funds.
• May have a hard time attracting high-caliber employees who usually prefer bigger companies while seeking a significant career. 
• Some employee benefits such as owner's medical insurance premiums are not directly deductible from business income.



Partnerships

In a Partnership, two or more people share ownership of a single business. The partners should have a legal agreement as to how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, and what steps will be taken to dissolve the partnership if needed. The partners should also decide up-front how much time and capital each will contribute, etc.

Advantages of a Partnership

• Partnerships are relatively easy to establish but there needs to be a good and thorough partnership agreement up- front.
• With more than one owner, the ability to raise funds may be increased.
• The profits from the business flow directly through to the partners' personal tax returns.
• The business usually will benefit from partners who have complementary skills.

  Disadvantages of a Partnership

• Partners are jointly and individually liable for the actions of the other partners.
• Profits must be shared amongst each other.
• Decisions are not so easy to make as disagreements can occur.
• The partnership may have a limited life as it may end upon the withdrawal or death of a partner.
   

Corporations

A corporation chartered by the state in which it is headquartered is considered by law to be a unique entity, separate and apart from those who own it. A corporation can be taxed, it can be sued, and it can enter into contractual agreements. The owners of a corporation act as its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes.

Advantages of a Corporation

• Shareholders have limited liability for the corporation's debts or judgments against the corporations.

• Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)


• Corporations can raise additional funds through the sale of stock.


• A corporation may deduct the cost of benefits it provides to officers and employees.


• Can elect S corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.

Disadvantages of a Corporation

• The process of incorporation requires more time and money than other forms of organization.

• Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.


• Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income; thus it can be taxed twice.

Subchapter S Corporations

A tax election only; this election enables the shareholder to treat the earnings and profits as distributions and have them pass through directly to their personal tax return. The catch here is that the shareholder, if working for the company, and if there is a profit, must pay him/herself wages, and must meet standards of "reasonable compensation". This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount.
   

      
Limited Liability Company (LLC)

The LLC is a relatively new type of business structure that is now permissible in most states. It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership.
The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued, if desired, by a vote of the members at the time of expiration. LLCs must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets, continuity of life, centralization of management, and free transferability of ownership interests.
It is taxed as partnership in most cases; corporation forms must be used if there are more than 2 of the 4 corporate characteristics, as described above.



Disclaimer:
All the information displayed on this website is not considered legal advice. Such information is solely for education purposes to the public and individuals should not try to resolve any problems relying on this information. Readers are cautioned not to attempt to solve individual problems on the basis of the information contained herein and are strongly advised to seek professional advice from an expert.