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Startup Saturday: Choosing The Right Legal Form For Your Business

[ 1 ] Sep. 28, 2013 | SBO Editor

When starting out, it is important to choose the right legal form for you new small business. You can talk to an accountant or even contact the local IRS office to receive more information.  The legal form you choose will affect your taxes, liability and more. Here’s a breakdown of six forms:

Sole Proprietorship: This is the form most small business owners choose when starting out. It works if you are a solopreneur and have no employees. This legal structure does not require any formal documentaion. At tax time, you will used the form known as Schedule C (Profit & Loss from Business).

General Partnership: If your business is a group, you will have a partnership. Make sure you map out each partner’s responsibilities and tasks along with what percentage of the company each partner owns. When you file your taxes, your accountant will file a U.S. Return of Partnership Income.

Limited Partnership: This form has two levels: general and limited. General partners are responsible for running the business and are liable for the debts and agreements made on behalf of the business. Limited partners are financial backers who have no control over the business but who share in the profits  and losses based on what they put into the business.

C Corporation: This form offers limited liability protection. It can be formed with the assistance of an attorney or an accountant. You must file paperwork that outlines the names of the officers, the directors, and the shareholders. In a C Corporation, the company pays taxes on the profits and then each shareholder must pay taxes on the money taken from that profit.

S Corporation: An S Corporation has the benefit of limited liability without the double taxation issue of the C Corporation. You must have an attorney or an accountant file the paperwork on your behalf.

Limited Liability Company (LLC): This form is very popular among small business owners. It permits more shareholders than an S Corporation and does not have the liability of other forms. You must file an Operation Agreement with a state agency, but you don’t need to have an accountant or an attorney file the paperwork for you.

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Category: Features

  • http://www.armcor.com/ armcor

    Creating a corporation with lots of outstanding shares is usually overkill because states charge based on shares. But if an entrepreneur plans to grow, take on partners, claim certain business deductions, or get working capital from a bank, factoring company, or investor, it is easier to set up an LLC early in the process rather than waiting. It only gets more difficult later to detangle your personal assets and accounts from the business. Why wait? A sole proprietorship is you and visa versa, for good and for bad. And for outsiders that reality offers less comfort.