The legal structure you choose for your small business can affect the personal asset liability protection you will get, the financial flexibility that it allows, the tax consequences, and the credibility you will have when contacting financial institutions, future investors, and clients. A business can be structured in several different ways, and each has benefits and drawbacks that should be considered.
Here are legal form's you can choose from:
-Sole proprietorship - Individual who runs a business solely by himself. It is the cheapest and easiest way to structure a business. The sole proprietor has ownership of the company and full control. All the profits and all the debts are the responsibility of the owner. It is easy to open and close, and you do not need to disclose information to the public.
-General Partnership - Co-owners of for a profit business can form a structure and decide between themselves who is responsible for what aspect of the firm. It is relatively easy to start, there are few government regulations, and possible tax advantages when you split the income. It is shared risk, and there is no need to disclose information to the public. But in a general partnership, the partners are responsible for each other's actions and debt. The partners also don't have the protection of their personal assets. A general partnership is a default in the legal system when two or more people are involved in a business venture.
-Corporation - Creating a company requires you to set and provide information about the structure, meetings, and records of the firm. You can issue shares to the shareholders, and the shares are transferable from one member to another. There are strict requirements for a board of directors. You can buy shares in a corporation. If you want to work with venture capitalists and are working toward the public offering, a corporation is a way to go. There are two kinds of business: S corporations. And C corporations. C Corporation can have unlimited numbers of shareholders and an infinite number of class stock. S Corporation is smaller, not more than 100 shareholders and has one class of stock. The difference is evident in the tax code. C corporations are double taxed, on the profits and the distribution to the shareholders. S corporations are taxed with "pass-through taxation." The profits are taxed only once.
-Limited Liability Company - Limited Liability Company has a flexible structure in which the owners can draft their operating agreement and define the duties of each of the members.
Sole ownership and general partnership do not provide protection against liability. Given a choice between Limited Liability Company and a Corporation, many small business owners feel more comfortable with an LLC which can be more flexible and you can parcel out profits. It can be less complicated to set up than a corporation.
Your original form of business doesn't have to be permanent. You can start as a sole proprietor or a partnership and later can convert your business to an LLC or a corporation.