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Suggested ReadingLegal Forms of Business OrganizationBusiness Organization Forms and a Business Form Selection ChecklistBusiness Organization FormsYou may have heard people talk about Sub-S corporations, LLCs and PCs and their relative merits. You will need to decide which form of business is right for you. Here is a brief description of each form:
Which Business Organization Form Should I Select? Here are some questions to ask yourself as you consider what business legal form to use: How much does it cost to set up? The costs range from minimal, for a sole proprietorship, to expensive, for a corporation. Here is a list, in order of cost from lowest to highest:
What happens to the business if I am no longer there? If you want the business to continue, form a corporation, or put provisions in your partnership agreement or LLC operating agreement to allow the business to continue without you. If you choose a sole proprietorship, the business ends if you leave or die or can no longer run the business. How much control do I have? Select a sole proprietorship or single-member LLC if you want complete control. In a partnership or multi-member LLC, you will have to share control with your partners or the other Members. In a corporation, you will have a Board of Directors helping you make decisions, so if total control over the business is important to you, dont incorporate. Who receives the profits and the losses? If you want all the profits, you must assume all the losses. Set up as a sole proprietorship or an LLC to keep all the profits (after taxes, of course!). If you set up as a corporation, you will have to give some money to the other shareholders in the form of dividends. Who pays the taxes? In a corporation, the business pays the income taxes, at the corporate tax rate. In most other forms, you can decide to pay taxes through your personal tax return, depending on your personal tax rate. What is my liability? As a sole proprietor, you will have all of the business liability for bad debts of the business, as well as for other liabilities, such as for negligence, product liability, or professional liability. You can limit your liability by setting up an LLC or, even better, by forming a corporation. Because the corporation is a separate entity, you may be shielded personally from the liability of the corporation. This is a tricky area, so make sure you understand your personal liability in each of these forms of business. Find out more from your attorney before you make a decision. In the end, whatever factor is most important to you will determine the form of business ownership you choose. Talk to your CPA and your attorney for more advice and information. Suggested Reading |
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