How To Choose The Proper Business Entity?

Choosing your business structure is just as important – if not more important – than marketing. You should consult with your accountant or your attorney in forming your business. The process in setting up your company is as follows; these are just the key points that need to be done, but not necessarily in the exact order listed.

First, you need to come up with a company name and ascertain if the URL is available for that website. If the URL is available for that name, the next step is to register that name with the Secretary of State in the state that you reside in. At this point, there are two options: One is to consult with your accountant or CPA to decide if you should be a sole proprietor, partnership, limited liability corporation or a Corporation. At the very least, reserve the name with your Secretary of State for a minimal fee while you decide what business entity you should be.

Here are the four types of business structures and a brief explanation of each:

1. Sole Proprietor – A Sole Proprietorship is one individual or married couple in business alone. Sole proprietorships are the most common form of business structure. This type of business is simple to form and operate, and may enjoy greater flexibility of management, less legal regulation, and fewer taxes. However, the business owner is personally liable for all debts incurred by the business.

2. Partnership – A General Partnership is composed of two or more persons (usually not a married couple) who agree to contribute money, labor, and/or skills to a business. Each partner shares the profits, losses and management of the business, and each partner is personally and equally liable for debts of the partnership. Formal terms of the partnership are usually contained in a written partnership agreement.

3. Limited Liability Corporation – A Limited Liability Company (LLC) is composed of one or more individuals or entities through a special written agreement. The agreement includes: provisions for management, ability to assign interests and distribution of profits and losses. Limited liability companies are permitted to engage in any lawful, for-profit business or activity other than banking or insurance. LLC’s cannot have more than 35 shareholders.

4. Corporation – A Corporation is a more complex business structure. As a chartered legal entity, a corporation has certain rights, privileges and liabilities beyond those of an individual. Doing business as a corporation may yield tax or financial benefits, but these can be offset by other considerations, such as increased licensing fees or decreased personal control. Corporations may be formed for profit or nonprofit purposes.

As you can see, each entity is somewhat different. In my opinion, I would either be a limited liability corporation or Corporation. There is a little bit more record keeping involved for a corporation, but is by far, well worth the time and effort that you expend. I attended to a financial seminar about 15 years ago and I learned that if I could take advantage of every deduction there was as, just a regular working person, I might only be eligible for 70 different deductions. If I owned a home there were a little over a hundred deductions. If I was in business for myself there were close to 200 available deductions. Here is where things changed: if I were a corporation, there were well over 300 deductions!

So, the moral of the story is this; if you can be a corporation, be a corporation, BUT you absolutely must talk to your accountant or attorney before you make a determination of which business entity you should be.

Source by Tom Perkins

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