One of the foremost things that you require doing while starting a business is choosing its legal entity, which is most often considered as a legal structure. But the entire process of selecting the perfect legal identity can be a daunting and also an intimidating task. Are you supposed to incorporate or not? In case you incorporate, should you go for an S-corporation or a C-Corporation? Is there any difference between an LLP and an LLC?
You need to know that there’s a difference in the way you pay your taxes and it is your business entity which drives this kind of difference. This is why it is vital to choose the best form for your business so that things don’t get complicated unnecessarily.
Few basic questions to ask yourself
If you can have apt answers to the few questions, this will give you a good starting place for gaining detailed information.
- What is the total number of business owners?
- Will they have equal responsibilities and shares or will some of them be acting as investors?
- How big will your business be?
- Are you all set to go public?
- What is the total risk factor that you will face in the profession?
- Will there be an accountant who can assist you throughout the entire tax season?
- How vital is it to safeguard your assets from the risk of any business?
- What is the rate of autonomy that you want while making business decisions?
Unincorporated or incorporated?
The first distinction that you should make is whether or not you will form an incorporated or an unincorporated business. A corporation is that kind of business which is taken as a separate entity under the laws of the state. Incorporating a business will mean separating it from the affairs, its litigation and taxes, from the personal ones. Hence, in case the business gets sued, you won’t get sued but only your business gets sued.
If it’s unincorporated, your personal assets don’t have protection. If you don’t incorporate your business, you will be easier with your taxes as you wouldn’t require paying separate taxes for the business.
Unincorporated business entities
- Sole proprietorships: You are the sole owner of the business and there won’t be any difference between you as the business owner or you as the person. You will responsible for all debts and profits.
- General partnership: This is similar to the previous one and here 2 or more people share profits, ownership and losses of a business. Everything is shared equally among partners.
- Limited liability partnership: Here each of the partner’s personal assets is all safeguarded from the other. The business is taxed only once instead of twice.
Among the incorporated business entities, S-corporations are the special kinds which eliminated the much-dreaded double taxation of the normal C-Corporations. The corporation doesn’t have to pay taxes but the shareholders can pay tax once on the profits which passed. They have got much stricter requirements of qualification.