Your business structure will also affect the amount of paperwork your business has to do, your ability to earn profit and the personal liability you face, aside from the fact that this decision has a huge influence on your tax payments.
Therefore, because each business type comes with different tax consequences, you should understand that you should choose the structure that most closely matches your company's needs and you have to make your decisions smartly.
Below are the 3 basic business structures:
Sole Proprietorship
Considered as the best business structure for those who want to have their own business because it only involves just one individual who owns, at the same time operates the entire business. Furthermore, it is also the simplest business structure.
This status automatically comes as long as you are the sole owner of your enterprise. You do not have to take any formal action to form a sole proprietorship.
Why is sole proprietorship advantageous?
* Less costly and easier to form - with this type of business structure, costs are minimal, with legal costs limited to obtaining the needed permits and license.
* Sole Control - you don't have to consult with anyone else when you need to make decisions or changes. Thus, you have complete control over your business decisions because you are the only owner.
- Easy Tax Preparation - because there is no legal separation between you and your business, your tax reporting requirements are easy to fulfil. With sole proprietorship, you can get the lowest tax rate of all the business structures.
Disadvantages:
- Unlimited personal liability - you can be personally liable for the debts and obligations of your establishment because there is no legal separation between you and your business.
2. Difficulty in raising capital - banks and other lending institution are hesitant to lend to a sole proprietor because they are perceived to have lack of credibility when it comes to repayment of the business fails.
Partnership
This structure is a kind of business where there are two or more people who share the ownership, liabilities and management.
Generally, there are 3 types of partnership arrangements. They are the following:
There are 3 general types of partnership arrangements:
* Limited Partnerships - they more complex than general partnership because they allow partners to have limited liability as well as limited input. These limits will depend upon each partner's investment percentage.
2. Limited Partnerships - are more complex than general partnership, which allows partners to have limited liability as well as limited input. These limits will depend upon each partner's investment percentage.
- Joint ventures - partners can be recognised as ongoing partners if their venture continues but they must file as such. However, for a limited period of time or for a single project, partners act as general partners.
Corporation
As a shareholder, your personal assets are protected from the corporation's debts and actions. Plus, corporations file taxes separately from their owners. The owners only pay taxes on corporate profits paid to them in the form of dividends and bonuses. Any additional profits are awarded a corporate tax rate, which usually lower than a personal income tax rate.
Corporations file taxes separately from their owners. Thus, the owners only pay taxes on corporate profits paid to them in the form of dividends and bonuses. Moreover, shareholders' personal assets are protected from the corporation's debts and actions. Any additional profits are awarded a corporate tax rate, which is commonly lower than a personal income tax rate.
Disadvantages:
A corporation is an independent entity owned by stakeholders because t is separate from its owners so it requires complying with more regulations and tax requirements. These make this structure more expensive and complex than most of other business structures.
A corporation is formed under the laws of the state in which it is registered and you will probably need an assistance of an attorney to guide you when starting a corporation. Furthermore, there are increased paperwork and recordkeeping burdens associated with this business structure.
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Companies that have a perfect business structure that is match with their businesses' nature have the greatest chances of becoming successful. For more on this topic, click the link above.
