Types of Business Structures
Various ways to set up your Business
Once you’ve filed a DBA, you are officially considered a sole proprietorship. Sole proprietorships are one of the four main forms of businesses; the others are partnerships, C-corporations, and S-corporations in the USA. In Canada there is only one type of private corporation. The main differences between these types of businesses lie in the income is divided and taxed and business liability laws that affect each one.
Sole proprietorships are the most popular forms for small businesses to take. They adhere to the simplest laws and require less paperwork than the other forms. In a sole proprietorship, you as the business owner have complete control. You have the final say in all business matters—and you are also responsible for everything that happens within your business. The sole proprietorship form is the best choice for part-time businesses or those meant for supplemental income.
While the advantages of a sole proprietorship lie in its simplicity, there are some disadvantages, particularly for businesses with high profits. When a sole proprietorship’s profits pass a certain amount, the income tax levied against earnings can approach 50 percent in some jurisdictions. Also, business owners with sole proprietorships are personally liable for the business—which means that if your business fails or declares bankruptcy, and you owe money to suppliers or customers, your personal assets can be used to repay your debts. This doesn’t happen often, but it does happen.
Partnerships are basically businesses with two (or more) sole proprietors. As discussed previously, partnerships can be complicated business forms. If you plan to set up a partnership, you must engage a legal professional to help you form the business. There are some more advanced forms of partnerships called Limited Partnerships. Also there are situations where you may have different levels of partners, some may be silent, others may be only for investment, etc.
If you anticipate building a strong, profitable online business, you should consider incorporation at some time as your business develops. When you form a corporation, you will not only pay lower taxes (20 to 25 percent, as opposed to up to 50 percent), you will also shield your personal assets from your business liability. This means if your business fails, your creditors can’t seize your house or your car to satisfy your debts. The drawback to incorporation is the initial cash outlay: it can cost from $200 to over $1000 to file for business incorporation.
There are also some fairly substantial tax savings from developing your business in phases from sole proprietor to partnership (if you have one, even your spouse or kids could be your partners) and then to incorporation, as size and profits dictate.
In the USA there are two forms of incorporation: C corporations and S corporations. For most Internet businesses, the C corporation is the best choice. The difference between the two types of corporations is, again, a matter of taxes: with a C corporation, all income tax is the responsibility of the primary shareholder—you, the business owner. In an S corporation, also referred to as a “pass-through,” some of the tax responsibility passes to other shareholders.
If you end up less responsible for taxes with an S corporation, why is a C
corporation the better choice? The answer is simple: how many shareholders are
you planning to have in your company? If you’re like most beginning business
startups, you probably responded with, “What’s a shareholder?”
The rules and regulations for S corporations are extremely complicated, and
generally cause nothing but headaches for single business owners. Also, the
tax savings are miniscule at best. With a C corporation, all of the business
control still rests with you.
Start Your Business
Making Your Business Official
Types of Business Structures
Taxation of Your Business
Your Business Plan
Announce Your Business to the World!
Have a Question??
|
