Sole proprietorship is the most common structure today - accounting for over 73% of businesses across the country. Sole proprietorship means that the company is ran by one person or a proprietor. This is common among small businesses such as a dog walker, boutique, or local grocery store. Unlike other structures there is no formal action that a company has to take to indicate sole proprietorship.
A sole proprietor files their taxes along with their personal taxes – because legally they are the same. One of the negatives about this structure is that there is no separation between you and your business. If your business goes into debt a person’s personal income is at risk.
A business may start off as a sole proprietorship but as it grows it may evolve into one of the other business structures such as a partnership. A partnership is exactly like it sounds. Instead of one person owning a business – two or more people own the business under a general or limited partnership.
A general partnership is usually reserved for co-owners. Each owner equally shares the profits, debts, and assets. Many organizations with a general partnership have a partner agreement that outlines each person’s responsibility within the company. While not legally required – it protects the owners if a disagreement arises. Pertaining to taxes – the company itself does not have to pay income tax – but the owners must claim their share of the business’ profits on their personal taxes.
A limited partnership is a bit more complex. A limited partnership can be made up of two or more people. At least one person is considered the general partner who is responsible for the bulk of legal liability while a limited partner’s responsibility is limited. A limited partner is usually an investor while the general partner is the person who manages day-to-day operations. Like a general partnership – those in a limited partnership do not pay income tax on the business, but both the general and limited partner must pay taxes.
Unlike the ease of a sole proprietorship or a general partnership – corporations are both expensive and complicated – but come with an increase of protection should the company go under or incur debt. While corporations are subjected to double taxes – there is leeway in the form of tax breaks. The benefits of a corporation is that they are allowed to raise capital through stock and can easily access a loan from a bank.
S corporation is a subset of a corporation. With an S corporation – the business is not taxed but the owners must pay personal taxes on their profits. There are also restrictions on who can invest in your business and how many.
Limited Liability Company
Finally, a limited liability company (LLC) is a mixture of all of the business structures taking both the positives and negatives from each. Owners of LLCs has minimal liabilities. As in corporations, the company itself is not taxed. Another pro is that it’s relatively easy to register for an LLC and depending on the state is not expensive to file paperwork.
In terms of negatives – an LLC does have limited liability – to a certain extent. While a corporation is a complete separation of the company and an owner’s personal assets – with an LLC it’s not always as clear cut.
Whichever business structure you chose – make sure you know the pros and the cons before you file paperwork. Before you make such a huge decision for your organization it’s important that you talk to a lawyer or a legal entity that can give you advice. And remember – if you file paperwork as a sole proprietor tomorrow – it doesn’t mean you cannot file for a partnership in a few years once your business had grown.
Last modified on Monday, 06 April 2020