Forming a business can be tricky. Each business comes with its own financial, legal, and operational implications and obligations. How do you know which one to choose?
Start by looking into the industry you’re entering and looking at how similar companies are formed. High-risk, common practices are more likely to form limited liability companies (LLC) for the liability protections; whereas professional services tend to use partnerships because they’re easier to form and easier to maintain. You may need a combination of a partnership and liability protection, you never know until you look.
When owning a corporation or an LLC, only the entity can be sued. Both grant full protection and consider owners separate entities. In limited partnerships, there are one or more general partners and one or more limited partners. Limited liability partners are only personally liable for the company’s debts up to the amount in which they’ve invested into the company; however, general partners have unlimited personal liability. This weight of liability is often eased by having a corporation or LLC serve as a general partner in the company.
Business structure is the determining factor as to how your business is taxed. Your business must meet all of the federal, state and local tax obligations to stay in good legal standing.
Sole-proprietorships are the assets to form but often cost the most in taxes. In sole-proprietor I ships you and the business are seen as one entity and you are taxed as one. You are personally responsible for all liabilities and all losses. LLCs provide protection for your personal assets but require additional and separate tax forms and some business structures have a more complicated tax process than that.
While this decision isn’t permanent, speaking to a business accountant and attorney about which business structure would work best for you so you can save a lot of time and money. They will be able to give you insight into the local and state requirements in your area as well as make sure you’re following the IRS guidelines.