There are no hard and fast rules as to what is the best way to
structure a business, and naturally, the decision will be based on your
own individual circumstances. But there are certain pros and cons to
each business structure that you should be aware of, as there are
certain rules that regulate the way business may be conducted in the U.
S.
Strategy - Consider converting your business to a Limited Liability Company to avoid personal exposure to business liability.
Sole Proprietorship and Partnerships do not offer owner(s) protection from business debts, whereas Corporations do.
For this reason alone, you should consider forming your business entity as a Corporation - to provide the owner(s) "1st Level" protection from business creditors. Of course, this only applies to debt that has not been "personally guaranteed" by any business owners.
This same level of protection can also be accomplished, without incorporation, using a "Limited Liability Company" (LLC). A "Limited Liability Company" is taxed as a partnership form of organization-using a Form 1065, (or as a corporation, using a Corporate Tax form) and issuing K-l (Form 1065) Schedules to each owner.
This is the newest method of structuring a business and is a fairly recent innovation. An LLC is like a Sole Proprietorship; however it provides the same protection from liabilities as that of a "C" or "S" corporation. In fact, this structure allows you to elect to be treated as a corporation without having to deal with the formalities of a corporation.
If there is only one owner, you can file and be taxed as a Sole Proprietorship. If there are two or more owners, you will be taxed as a partnership.
Here's why you may want to consider using the LLC form of business organization.
Advantages
· Limits liability just like a regular corporation.
· One person can own the LLC, which eliminates the need to file a separate tax return.
· Other entities such as a C Corp, trust, or partnership can own an LLC.
· Does not require the formal meetings and documentation of a "C" or "S" corporation.
· Tax filing and other paper work is simple and inexpensive.
· You can claim all the same tax advantages of Sole Proprietorship and partnerships.You don't have to hold shareholder meetings or keep meeting notes.
· Management control need not be proportional to ownership.
The advantages of a "Limited Liability Company" over an "S" Corporation form of business organization are as follows:
· An "LLC" is not limited to 100 owners;
· An "LLC" allows foreign individuals to be owners, and
· An "LLC" cannot have its status revoked if it engages in real estate activities.
Disadvantages
· The major disadvantage of an LLC is that it does not provide a FICA tax break like an "S Corporation" does (except in the case of hiring a spouse or children... their salary is not subject to FICA taxes if they are under the age 18).
· The laws which govern an LLC are not uniformly written among the states. Because there is no uniformity between states with regard to the tax treatment of an "LLC", there may exist some potential for exposure to additional liability at your local and/or state level.
Under a "Limited Liability Company" its owners are not called owners or partners, but rather are referred to as "members." Each member enjoys an upper limit on their own personal liability potential in an amount equal to the dollars they personally invested in the "LLC"-just like the liability protection afforded "S" Corporation shareholders.
One final thought on multiple ownerships within partnerships, LLC's or corporations. What happens if you and one other owner in your business do not get along? Bad relationships have resulted in some of the most expensive and protracted legal battles around. This kind of business contention is as bad as a divorce.
Thus, take the following advice:
If you incorporate or structure your business as an LLC and have multiple owners, always set up a "buy-sell" agreement at the launch of your business. This will eliminate a lot of problems you could encounter later. Think of "buy-sell" arrangements as some sort of business prenuptial agreement.
Article Source:
http://EzineArticles.com/?expert=Brad_Gillies
Strategy - Consider converting your business to a Limited Liability Company to avoid personal exposure to business liability.
Sole Proprietorship and Partnerships do not offer owner(s) protection from business debts, whereas Corporations do.
For this reason alone, you should consider forming your business entity as a Corporation - to provide the owner(s) "1st Level" protection from business creditors. Of course, this only applies to debt that has not been "personally guaranteed" by any business owners.
This same level of protection can also be accomplished, without incorporation, using a "Limited Liability Company" (LLC). A "Limited Liability Company" is taxed as a partnership form of organization-using a Form 1065, (or as a corporation, using a Corporate Tax form) and issuing K-l (Form 1065) Schedules to each owner.
This is the newest method of structuring a business and is a fairly recent innovation. An LLC is like a Sole Proprietorship; however it provides the same protection from liabilities as that of a "C" or "S" corporation. In fact, this structure allows you to elect to be treated as a corporation without having to deal with the formalities of a corporation.
If there is only one owner, you can file and be taxed as a Sole Proprietorship. If there are two or more owners, you will be taxed as a partnership.
Here's why you may want to consider using the LLC form of business organization.
Advantages
· Limits liability just like a regular corporation.
· One person can own the LLC, which eliminates the need to file a separate tax return.
· Other entities such as a C Corp, trust, or partnership can own an LLC.
· Does not require the formal meetings and documentation of a "C" or "S" corporation.
· Tax filing and other paper work is simple and inexpensive.
· You can claim all the same tax advantages of Sole Proprietorship and partnerships.You don't have to hold shareholder meetings or keep meeting notes.
· Management control need not be proportional to ownership.
The advantages of a "Limited Liability Company" over an "S" Corporation form of business organization are as follows:
· An "LLC" is not limited to 100 owners;
· An "LLC" allows foreign individuals to be owners, and
· An "LLC" cannot have its status revoked if it engages in real estate activities.
Disadvantages
· The major disadvantage of an LLC is that it does not provide a FICA tax break like an "S Corporation" does (except in the case of hiring a spouse or children... their salary is not subject to FICA taxes if they are under the age 18).
· The laws which govern an LLC are not uniformly written among the states. Because there is no uniformity between states with regard to the tax treatment of an "LLC", there may exist some potential for exposure to additional liability at your local and/or state level.
Under a "Limited Liability Company" its owners are not called owners or partners, but rather are referred to as "members." Each member enjoys an upper limit on their own personal liability potential in an amount equal to the dollars they personally invested in the "LLC"-just like the liability protection afforded "S" Corporation shareholders.
One final thought on multiple ownerships within partnerships, LLC's or corporations. What happens if you and one other owner in your business do not get along? Bad relationships have resulted in some of the most expensive and protracted legal battles around. This kind of business contention is as bad as a divorce.
Thus, take the following advice:
If you incorporate or structure your business as an LLC and have multiple owners, always set up a "buy-sell" agreement at the launch of your business. This will eliminate a lot of problems you could encounter later. Think of "buy-sell" arrangements as some sort of business prenuptial agreement.
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