When starting a new business, you need to decide which legal form is best for you and your business. Do you want to own the business yourself and operate as a sole proprietorship? Or do you want to share the shareholding, operate as a partnership or as a corporation? Before we discuss the pros and cons of these three types of property, let`s touch on some of the questions you`re likely to ask yourself when choosing the right legal form for your business. Although each state`s LLC incorporation document is different to some extent, there are several common elements. Managers, for example, are often more interested in career advancement than in the overall profitability of the business. Shareholders may care more about profits, without regard for the well-being of employees. This situation is called a mandate problem, a conflict of interest inherent in a relationship in which one party is expected to act in the best interests of the other. It is often quite difficult to prevent self-interest from entering these situations. Where is your business going and what kind of legal form allows for the growth you envision? Contact your business plan to review your goals and see which structure best fits those goals. Your business should support the opportunity for growth and change, not hold it back from its potential. Choosing the right legal form for your business starts with analyzing your company`s goals and considering local, state, and federal laws. By defining your goals, you can choose the legal structure that best fits your company`s culture.
As your business grows, you can change your legal structure to meet the new needs of your business. While it may be common to hear about an “incorporated” LLC, the correct way to describe the formation of an LLC (or a type of entity other than a corporation) is to say that it was “founded” or “organized.” “Incorporation” and “articles of association” are terms that apply to a corporation (whether taxed as a C corporation or an S corporation). Overview of the Tax Implications of LLCs and Corporations There are significant differences in how LLCs and corporations are billed at state expense, operated under state law, and taxed by federal and state governments. These factors should be taken into account when choosing the form of organization of your company. A non-profit corporation (sometimes called a non-profit organization) is an organization that was created to serve a public purpose rather than financial gain. As long as the activity of the organization serves charitable, religious, educational, scientific or literary purposes, it may be exempt from income tax. In addition, individuals and other organizations that contribute to the not-for-profit corporation can claim a tax deduction on these contributions. The types of groups that typically apply for charitable status vary widely and include churches, synagogues, mosques and other places of worship. Museums; Universities; and conservation groups. To ensure the availability of the name you want for your LLC, whether or not it is registered as a DBA name, you should perform an LLC name search on your founding state`s website to see if the desired name is available.
If you`re not ready to file your LLC incorporation document yet, it`s a very good idea to reserve the name. Many states allow you to do this for a small fee and a short period of time. The headline read, “Searched: Over 2,000 in Google Hiring Spree.” 9 The world`s largest web search engine has announced plans to grow internally and increase its workforce by more than 2,000 people, with half of its hires coming from the U.S. and the other half from other countries. The additional employees will help the company expand into new markets and attract global talent to the highly competitive sector of Internet information providers. When executed correctly, organic growth benefits the business. No form of ownership will give you everything you desire. You have to compromise.
Since each option has both advantages and disadvantages, it is up to you to decide which one offers the most important features for you. In the following sections, we compare three ownership options (sole proprietorship, partnership, corporation) in these eight dimensions. Pay corporate tax at a different time than other forms of business – The owner receives all profits. – Profits are taxed only once. – The owner makes all the decisions and has full control over the business (but this could also be an inconvenience). – This is the easiest and most cost-effective form of ownership to arrange. – This is the most common business structure and was created specifically for small businesses. – This type of entity requires insurance in case of prosecution. – It is an independent legal entity. – LLCs are generally taxed as sole proprietorships. – LLCs can have an unlimited number of owners. Five years after starting their ice cream business, Ben Cohen and Jerry Greenfield evaluated the pros and cons of owning the business, and the “professionals” won.
The main motivation was the need to raise funds to build a $2 million manufacturing plant. Not only did Ben and Jerry decide to go from a partnership to a public company, but they also decided to sell shares to the public (and thus become a public company). Their sale of shares to the public was somewhat unusual: Ben and Jerry wanted the community to own the company, so they didn`t offer the shares to anyone interested in buying a stock, but only to Vermont residents. Ben believed that “companies have a responsibility to give back to the community from which they get their support.” 5 He wanted the company to be owned by those who lined up at the gas station to buy cones. The stock was so popular that one in every hundred families in Vermont bought shares of the company.6 Eventually, as the company continued to expand, the shares were sold nationally. The vast majority of small businesses start as sole proprietorships. These businesses are owned by one person, usually the person who has day-to-day responsibility for running the business. Sole proprietors can be independent contractors, freelancers, or home-based businesses. A company is structured in such a way that it has a board of directors that makes the most important decisions that guide the company. A single person can control a business, especially when it starts, but as it grows, the need to operate it as a board-run entity also increases.
Even for a small business, rules meant for large organizations still apply, such as writing down all the important decisions that affect the business. A corporation (sometimes called a regular corporation or C corporation) is different from a sole proprietorship and a partnership because it is a legal entity that is completely separate from the parties who own it. He can enter into binding contracts, buy and sell real estate, sue and be sued, be held liable for his actions and be taxed. Once companies reach a size, it is advantageous to organize themselves as companies so that their owners can limit their liability. Thus, on average, firms are much larger than firms that use other forms of ownership. As shown in Figure 6.2, businesses account for 18% of all U.S. businesses, but generate nearly 82% of revenues.3 Most large, well-known businesses are corporations, but so are many of the smaller businesses you`re likely to do business with. – It can be expensive.
– Shareholders are limited to individuals, estates or trustees. – It is subject to the necessary administrative tasks. – It cannot provide ancillary services paid for by the company. – Shareholders are limited to citizens or residents of the United States. If the LLC you have formed operates in more than the state of incorporation, you will need to register in each “foreign” state or qualify abroad. This usually requires filing an application for approval with the Secretary of State. A certificate of good repute is often required. The LLC must also appoint and maintain a registered agent. Check out our list of LLC articles covering topics ranging from incorporation status to tax implications. Ownership costs vary depending on the market your business belongs to. Typically, your initial expenses include state and federal fees, taxes, equipment supplies, offices, bank fees, and any professional services your business wants to receive.