What Is a Corporation Legal Structure
The most common legal structures for companies are sole proprietorship, partnership, LLC (limited liability company), company, and corporation, but there are other options as well. To qualify as an S company, your business must meet the following requirements: It is important to follow all business rules required by state law. You must keep accurate financial records for the business that show a separation between the income and expenses of the business and those of the owners. “A company`s capital,” says Baker, “can be increased at any time in a private offering by issuing and selling additional shares. This is especially useful when banks are short of cash. Business owners may also be eligible for tax deductions, such as health insurance. Unlike a limited liability company, a sole proprietorship is not required to comply with common requirements such as shareholder meetings and votes or elections of directors. On the other hand, since it is not a separate legal entity from its owners, the owners are personally liable for the debts, obligations and obligations of the company. There are also variations of some of these basic legal forms: the S Company, the Limited Partnership and the Limited Liability Company (LLC), a relatively new form of business organization that has acquired legal status in most states. The two types of companies are C-Corps and S-Corps.
The main difference between the two types of companies is the tax treatment of the two companies: “States have different requirements for different business structures,” Friedman said. Depending on where you settle, there may also be different requirements at the municipal level. When choosing your structure, you understand the state and industry you are in. It`s not a one-size-fits-all solution, and businesses may not know what applies to them. “If the nature of the business is such that the business doesn`t have to keep a large portion of the profits in the business. In this case, all or most of the profits can be distributed in the form of dividends, without the double taxation that would occur if no S company statute were in force. Another important question to ask yourself is: “What do I want to happen to the company when I`m no longer around to run it?” Although a sole proprietorship or partnership can dissolve upon the death of its owner(s), a corporation can easily be distributed to family members. You need professional legal advice to make this decision, but the first step is to learn what the different structures are, depending on your situation, long-term goals, and preferences. Key Finding: The five types of business structures are sole proprietorships, partnerships, limited liability companies, corporations and cooperatives. Choosing the right structure largely depends on your type of business. As your business grows, you can modify structures to meet its needs.
A choice of S company should not be made without the advice and support of a tax specialist, as this is a very complex and technical area of tax law. If you apply for incorporation yourself, you`ll save on the cost of hiring a lawyer, which can cost anywhere from $500 to $1,000. The downside of this way is that the process can take some time. It`s also possible that you`re missing a small but important detail in your state`s law. A sole proprietorship is a business owned by a single person. This is the easiest type of structure to set up. However, this does not mean that there are no rules to follow. The process varies from state to state, but the steps to act as a sole proprietorship are very simple. Of all the decisions you make when starting a business, one of the most important is the type of legal structure you choose for your business. This decision affects not only how much you pay in taxes, but also how much paperwork your business has to do, the personal responsibility you face, and your ability to raise funds.
If a corporation intends to go public by issuing common shares to the public, it must first be incorporated. Companies must pay federal and state taxes, while shareholders must disclose their dividend payments when filing their personal income taxes. One of the great advantages of a partnership is the tax treatment it receives. A partnership does not pay tax on its income, but “transfers profits or losses to individual partners.” When filing their income tax return, each partner submits a Schedule K-1 form detailing their share of the partnership`s income, deductions and tax credits. In addition, each partner is required to report the partnership`s profits on their individual income tax return. Although the partnership does not pay income tax, it must calculate its income and report it on a separate information return, Form 1065. Personal liability is a major concern if you use a partnership to structure your business. Similar to a sole proprietorship, general partners are personally liable for the obligations and debts of the corporation.
As a small business owner, you need to play many roles to keep the business running smoothly and properly. However, there are times when you shouldn`t try to be a lawyer, accountant, marketer, foreman, salesperson, etc. Instead, take advantage of the professional advice that is so readily available. A good lawyer, or CPA, can help you interpret the many legal and technical issues related to one or all of the legal structures of businesses. Your time and money savings for hiring a professional advisor can more than offset the potential cost of missteps and misturns when choosing your company`s business structure. Since laws are constantly changing, it`s best to consult a lawyer or accountant for the latest regulations and requirements before deciding on the right business structure for you. It`s important for tax purposes to separate your business and personal finances, so create a business bank account and get a business credit card. A sole proprietorship doesn`t offer you personal protection against legal claims against the business, so it`s a good idea to take out liability insurance as well.
You`re also personally responsible for the company`s financial obligations, so consider commercial liability insurance as well. One very important thing to keep in mind is that you can change the organizational structure of your business if your situation changes. It is possible to start as a sole proprietorship and convert it into an LLC or corporation. As your needs grow and change, so can your business structure. As always, it`s best to consult with your lawyer and accountant to find out what`s best for you. One of the first decisions made by a new business owner is the type of legal structure the business will have. There are several ways to start your business, and each has implications for taxes, financing, and your personal liability. As with partnerships and sole proprietorships, LLC members are considered self-employed and must make their own tax contributions to health insurance and social security. An LLC can also apply for S-company status, which can offer other tax benefits.
A lawyer or accountant may be able to advise you on this.
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