Setting up a business is an important and exciting step for a new business owner. Because of that, new business owners should be familiar with the different options they have the implications of each to help them make the best business formation decision possible.
Sole proprietorship
A sole proprietorship is the simplest business form that has one owner. There are no incorporation documents to file to form a sole proprietorship. The income of the sole proprietorship is reported on the sole proprietor’s personal income tax form. A potential downside is that the sole proprietor does not have person protections from lawsuits or creditor claims and may be liable for business debts and legal judgments against the business.
Partnership
A partnership is another option if there are two or more partners in the business. There are not incorporation documents to file, however, the partners should have a partnership agreement between them. The profits and losses are also reported on the personal income tax forms of the partners. The partners, like sole proprietors, are liable for business debts and legal judgments against the business.
Limited liability company
Limited liabilities companies (LLCs) have members who enjoy personal liability from business debts and legal judgments against the business. Articles of organization need to be filed to form an LLC. The members of the LLC can decide if they want to be taxed as a partnership or a corporation.
Corporation
A corporation is formed by filing articles of incorporation. The owners of the corporation are not personally liable for the business debts of the corporation or legal judgments against it. Corporations may be considered double taxed because the corporation must pay taxes on its earnings and the shareholders must pay taxes on their dividends. Corporations, unlike sole proprietorships are considered the most complex and expensive business form.
Business law can help new business owners navigate a variety of different considerations including business formation decisions. The business form selected has a significant impact on the future operations of the business which is why business owners should know their options.
