BUSINESS STRUCTURES

OVERVIEW

INTRODUCTION TO BUSINESS STRUCTURES

One of the first steps in forming a legal business is to choose a legal business structure. There are six main types of legal structures that you would choose from: Sole Proprietor, Partnership, LLC, S Corporation, C Corporation, and Nonprofit Corporation.

This document will provide detailed definitions of each business structure, specific advantages and disadvantages of each, steps to forming the company under each structure, and lists of forms and contracts needed.

SOLE PROPRIETORS

A sole proprietor is a single-owner business that is established the moment you start your business. Most small-business people begin as sole proprietors because it’s cheap, easy, and fast to establish.

REGISTERING YOUR BUSINESS

You do not have to even register a business name to be a sole proprietor; however, it would not be a bad idea to. If you do not register a business name, your business is considered your own name.

To register your business name, all you really have to do is go down to your local county/state clerk’s office and apply for a DBA (doing business as). This is usually a small fee (about $20 or so, depending on the state) to do. You may need a state/federal tax ID number as well, which you can get after you get your DBA.

If you plan to name your company a name that doesn’t have your last name in it, you will be registering a fictitious business name. This is just another way to say DBA. For more information on choosing a business name, see the Business Name article as part of this software package.

TAX ISSUES FOR SOLE PROPRIETORS

Other advantages of sole proprietorships are that there are some tax advantages for this type of entity. Corporations have to pay taxes on the profits of the business as well as the owners have to pay taxes on their personal salaries, so there is a double-taxation.

With sole proprietors, the business owner and the sole proprietor are treated as a single entity, so business income/loss are reported on the owner’s federal tax return (Form 1040, Schedule C); therefore, there is only a single-taxation.

The government gives tax advantages to business owners by allowing them to write off all expenses incurred in pursuit of profit. However, make sure you keep accurate records. A great way to do that is through the www.mybusinesskit.com Accounting Software products.

Sole proprietors must make contributions to the Social Security and Medicare systems, called self-employment taxes. The self-employment tax rate for 2002 is 15.3% of the first $84,900 of income and 2.9% of everything over $84,900. These taxes are reported on Schedule SE.

There are also downsides to how sole proprietors are taxed. For example, if you are a corporation, you can leave money in the business at the end of the year and are taxed at the lower rate of less than 15%. As a sole proprietor, any money left over is taxed at the individual tax rate, which would probably be over 27%.

PERSONAL LIABILITY FOR SOLE PROPRIETORS

The main disadvantage of a sole proprietor is, however, that the owner and the business are, in essence, the same. Meaning, if the business goes down or an accident occurs where someone gets hurt and people try to sue the company, the owner is personally liable for everything, so upset customers can come after the business assets as well as the owner’s personal assets, like his or her home. For this reason, businesses with high risk to injury or something similar should lean towards either an LLC or corporation.

FORMS FOR SOLE PROPRIETORS

The following is a list of forms and contracts that a sole proprietor may need. Not all of the forms are essential, depending on your business. Many of these forms are included as part of the Business Legalities Software package:

PARTNERSHIPS

A partnership is virtually the same as a sole proprietor, with many of the same benefits and disadvantages, but it involves two or more persons. A partnership is a business with more than one owner that has not filed papers to become a corporation or LLC.

GENERAL AND LIMITED PARTNERSHIPS

There are two main types of partnerships: general partnerships and limited partnerships. General partnerships share all responsibilities of the business. Limited partnerships consist of one general partner, and the other partners are limited partners. The benefits of a limited partnership are that the general partner has the freedom and flexibility to run the business as he/she wishes, and the limited partner is protected if something goes wrong.

PERSONAL LIABILITY FOR PARTNERSHIPS

Like sole proprietors, partnerships share the responsibility of the business. Personal liability falls on the heads of the partners in a partnership. An ugly lawsuit can result in the loss of your home or other personal assets.

Also, if one partner signs an agreement for the company, the entire company is legally bound to the agreement, not just the person who signed it. Therefore, trust is a key element in forming a partnership.

PARTNERSHIPS AND TAXES

Partnerships are taxed like sole proprietors. Business income is passed through to each partner, where he or she would then pay his or her own taxes on the amount. The IRS requires Form 1065 and Schedule K-1, and Schedule E each year. Partners must estimate the amount of tax they will owe for the year and pay it out quarterly.

THE PARTNERSHIP AGREEMENT

The main key to an effective partnership is to spell out everything, in writing, about every element of the business. Everyone knows someone that has been taken advantage of in a partnership.

Make sure you spell out very clearly the parameters of the partnership, that is: who's responsible for what kinds of decisions, who has final authority if you disagree, what happens if one partner isn't living up to the expectations of the other, and how much money each partner takes home.

This is only a partial veiw of this form, upon purchasing the software you will have a complete view that will be available in Microsoft Word for personalization and editing.