When you start
a business, you must decide on a legal structure for
it. Usually you'll choose either a sole proprietorship,
a partnership, a limited liability company (LLC), or
a corporation. (Also, some businesses choose to operate
as cooperatives.) There's no right or wrong choice that
fits everyone. Your job is to understand how each legal
structure works and then pick the one that best meets
your needs. The best choice isn't always obvious. You
may, after reading this section, decide to seek some
guidance from professionals.
For many small businesses, the best initial choice is
either a sole proprietorship or, if more than one owner
is involved, a partnership. Either of these structures
makes good sense in a business where personal liability
isn't a big worry - for example, a small service business
in which you are unlikely to be sued and for which you
won't be borrowing much money. Sole proprietorships
and partnerships are relatively simple and inexpensive
to establish and maintain.
Forming and operating a corporation is. more complicated
and costly, but it's worth it for some small businesses.
The main feature of LLCs and corporations that attracts
small businesses is the limit they provide on their
owners' personal liability for business debts and court
judgments against the business. Another factor might
be income taxes:
You can set up an LLC or a corporation in a way that
lets you enjoy more favourable tax rates. In certain
circumstances, your business may be able to stash away
earnings at a relatively low tax rate. In addition,
an LLC or corporation may be able to provide a range
of fringe benefits to employees (including the owners)
and deduct the cost as a business expense.
Given the choice between creating an LLC or a corporation,
many small-business owners will generally be better
off going the LLC route. For one thing, if your business
will have several owners,the LLC can be more flexible
than a corporation in the way you can parcel out profits
and management duties. Also, setting up and maintaining
an LLC can
be a bit less complicated and expensive than a corporation.
But there may be times a corporation will be more beneficial.
For example, because a corporation - unlike other types
of business entities - issues stock certificates to
its owners, a corporation can be an ideal vehicle if
you want to bring in outside investors or employees
with stock options.
Keep in mind that your initial choice of a business
form doesn't have to be permanent. You can start out
as sole proprietorship or partnership and later, if
your business grows or the risk of personal liability
increase, you can convert
business to an LLC or a corporation.
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