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Best Business Entity for Small Business and Entrepreneurs

July 26th, 2007 by rosie · 2 Comments

Part of starting your own business is deciding which business entity suits your needs the most. Make sure you do your research and choose wisely, not by default. There are a few main points to consider when comparing the different options:

1. Cost. There may not only be initial costs when creating your business entity, but in some cases and some states, you may have to pay ongoing yearly fees to maintain your licenses, permits, or other similar fees. Do your research to make sure you don’t get penalized for failing to comply with city, county, state, and federal laws.

2. Taxes. This is definitely an area you need to be familiar with if you are or will be a business owner. Different business entities have different tax rules and benefits. For example, a properly structured LLC is not taxed at the entity level, instead income and loss is passed on to the members.

3. Ownership. A big part of choosing the best business format is defined by who the owners are: Are you the sole owner? Do you have a partner or partners? Is it possible that your business may go public in the future?

4. Liability. What business owner isn’t concerned about liability in such a sue-happy time? Some entities protect their owners from personal liability in the event of a claim against the business.

5. Requirements. What has to be done to maintain such an entity? In a sole-proprietorship, there are few requirements in maintaining that entity. But in other entities, there must be meetings, a board of directors, and annual reports. Be familiar with what your business entity requires as far as records and the legal paperwork. If you want to take the hassle out of things however, you can use a company like Florida Inc. to handle the details for you.

There are several different business entities for the entrepreneur today, each with it’s own advantages and drawbacks.

Relatively inexpensive to set up and with few recurring costs, a sole proprietorship can only have one owner (a person, not a corporation, etc.) and cannot be sold or passed on to one’s inheritors. It cannot take advantage of special business income tax rates since all income is considered personal income. It also offers no protection from personal liability. Check with you local authorities to make sure you get all the necessary licenses, permits, and are in compliance.

Also generally easy and inexpensive to create and maintain. Made up of two or more legal entities which are individually responsible for the partnership. The partnership itself pays no taxes; all partners are considered self-employed and claim their share of the partnership’s income on their individual tax returns. No protection for personal liability. there is usually a partnership agreement drawn up a creation that outlines various topics like duration, management, and transferability- but this is not necessary.

Similar in structure to a general partnership, a limited partnership has two different kinds of partners: general and limited. The limited partner does not take part in the management of the business and is not liable for any more than his capitol investment. This entity encourages investors to become limited partners and share in the income but never lose any more than their own contribution.

One of the most expensive to begin and maintain, a “C” corporation is the standard state-formed corporation. It files it’s own taxes and is responsible for it’s own dealing. It can have an unlimited number of shareholders and the shareholders can be any kind of entity. A board of directors must be elected, annual meetings must be held, meticulous records must be kept, and stock must be issued. If these rules aren’t followed, then personal liability protection is not guaranteed. Additionally, “C” corporations are double taxed- at the entity level and again when shareholders claim the gains on their tax returns.

Very similar to a “C” corporation in that it is its own legal entity, protects it’s shareholders from personal liability, and is costly and requires effort to create and maintain. But it avoids the “double tax” issue because shareholders claim this income directly on their personal income returns. They are usually more costly than a “C” corporation and may be limited to 75 shareholders.

Sort of a mix between a corporation and a partnership, an LLC provides the same kind of tax and liability benefits as a corporation, but has the same management structure as a partnership. Forming an LLC can be as complicated as forming a corporation, but not quite as costly. Also, there must be an Operating Agreement, but it can be verbal in many states.

OK. Now that you have done your research, forming your new business is pretty straightforward. Decide which entity is the most suitable for your business. Then choose the state where you want to form your company in (you may want to look into the different benefits and disadvantages each state has when it comes to the different business entities). Choose a name for your business. Submit the proper paperwork and pay the necessary fees associated with the permits, licenses, etc. Oh, and the last thing to do is hang a “We’re Open For Business” sign on your door.

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    Tags: Business How-To's · Running a Business

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    2007-07-31 22:48:32

    Informative article!

    Thank you.

    (Comments wont nest below this level)
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