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What are the most common business structures?

On Behalf of | Mar 31, 2020 | Firm News |

If you’re ready to start your own business, one of the most important steps you will need to take before registering with the state is choosing the right business structure. The business structure you select will dictate a number of factors, from day-to-day operations and tax payments to the amount of personal liability you will face.

The right structure for your business will vary based on the company’s interests and needs. It’s recommended that you choose a business structure that provides a good balance of both benefits and legal protections.  While you may change your business structure down the road, choosing the appropriate structure today can help you to avoid tax consequences and other complications in the future.

Sole Proprietorship

A sole proprietorship is typically for those who work alone and own and operate their business. In this structure, you have complete control of your enterprise. However, there are some disadvantages. With sole proprietorship, you will be personally responsible for your company’s liabilities, and any of your assets could be seized in the event of debt or a lawsuit.

Partnership

Similar to sole proprietorship, a partnership business structure shares the rights and obligations among two or more business owners. Each partner of the business will split any profits or losses they encounter. However, as with sole proprietorship, there is not much legal protection. All partners are personally liable for the business debts and obligations.

Corporation

A corporation business structure is a legal entity separate from the business owner or owners. In most cases, the shareholders of a corporation are not held personally liable for the obligations of the business, but it does come with higher costs. Corporations formed under the laws of the state can have more complicated tax rules and regulations than a partnership or sole proprietorship. Corporations also must pay income tax.

Limited Liability Company

A limited liability company, or LLC, combines the benefits of a partnership and corporation. An LLC business structure will protect your personal assets in the event of bankruptcy or a lawsuit. LLC’s also avoid corporate taxes. Any earnings or losses will show up on the personal tax returns of the owners.

Choosing your structure

Before choosing the business structure for your company, be sure to carefully weigh the pros and cons of your options. If you are unsure which structure would be the most beneficial, an accountant or attorney can help you determine the best fit.

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