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Which Company Structure is Right for You?
Written by:Article Overview: Which company structure is right for you? - For brand new entrepreneurs who are looking to start a business, the question of company structure will come up at some point. The names are well known – sole proprietorship, partnership, limited liability company, corporation – but the differences between these four types are not always common knowledge. In this article, you'll read about the four types of structures. You'll learn briefly what characterizes each one, how income flows through to the owners, and what kind of legal implications there are. This article can be a starting point for you as you decide what structure your business will take.
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Which Company Structure is Right for You?
Which Company Structure is Right for You?
As a small business owner, you need to make important decisions regarding the business structure for your company. Each structure has certain advantages and disadvantages, particularly in the area of tax requirements. Due to the complexities of tax law, it’s highly recommended that you seek legal advice from a qualified tax professional prior to making your final decision.
Sole Proprietorship: Sole proprietorship is the simplest type of company structure. It may be your best choice if you work alone and have no significant liability risks. You may need to obtain a business license or other paperwork, but the requirements are generally less than for other business structures.
Depending on state laws, you may be able to operate a sole proprietorship under your name, or you may select a business name. You will probably not need a federal tax identification number, as your business taxes can be filed alongside your personal taxes, using additional forms.
A sole proprietorship generally provides no liability protection for the business owner. If anything goes wrong, you may be personally sued.
Partnership: A partnership is, in many ways, basically a sole proprietorship with multiple owners. The partnership will need a business name and a federal tax identification number. A partnership agreement must be drawn up and signed by all partners. This document must, among other requirements, contain a specific formula for division of profits between partners. The partnership agreement can be complicated, and may serve as evidence in a court of law, so it is highly recommended that you consult an attorney for assistance in drawing up the agreement.
Income from the company, in effect, passes through the partnership to the individual partners. The partnership will file tax forms demonstrating its financial performance, and a statement will sent to each partner documenting that performance and indicating that partner’s tax obligations. The partners are then responsible for paying those taxes. A partnership, like a sole proprietorship, provides no liability protection. The partners are eligible to be sued.
Limited Liability Company: The next step for partnerships that are concerned about liability is the limited liability company. The protections offered by LLC organization vary widely between jurisdictions. Therefore, it is highly recommended that legal counsel be obtained prior to organizing as an LLC.
Corporation: A corporation is, by far, the most complicated type of business structure to organize and run. However, it is also the only structure that fully protects the owners from lawsuits against the business. Unlike sole proprietorships and partnerships, owners of corporations are paid a wage (plus dividends) rather than "sharing" in the revenue of the company. The corporation is considered a separate legal entity. If a lawsuit is brought, it will be against the company rather than the company owners. Of course, the owners may still be sued for their own actions, but not those of the company. Organizing a corporation requires owners to follow a complicated step by step process. Therefore, any company should retain a qualified attorney to assist with the formation of corporation.
Choosing one now doesn't mean you're locked in (although it does take some paperwork to move from one to another). Your small business may start as a sole proprietorship or partnership and could become a corporation, which is a common company structure roadmap for many small businesses that grow.
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Article Tags: best choice, business license, business structure, business structures, company structure, complexities, federal tax identification, federal tax identification number, final decision, important decisions, individual partners, legal advice, liability protection, liability risks, partnership agreement, small business owner, sole proprietorship, state laws, tax forms, tax identification number
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How to valuate a business
- Hi Garth - here is how we did it at Northern Crown Capital when I was helping them raise venture capital for Toronto-based entrepreneurs. Assume the start date is 2003 so 2008 projections are 5 years out:
How Northern Crown Capital Valuates a Business
2008 Financial Projections
Earnings Before Tax
$5,865,000
Tax Rate
42%
Taxes
$2,463,300
Net Earnings
$3,401,700
Amount Seeking to Raise Today
$3,500,000
Discounted Value of Future Opportunity, 5 Years Out
2008 P/E Ratio
15
Value of Company in 2008
$51,025,500
Discount Rate Applied
30%
Year 2008
$51,025,500
Year 2007
$35,717,850
Year 2006
$25,002,495
Year 2005
$17,501,747
Year 2004
$12,251,223
Value of Company at Investment in 2003
$12,251,223
Less: Investment Amount
$3,500,000
Present Value
$8,751,223
Discount for Risk & Private Company
40%
Less: Discount for Risk & Private Company
$3,500,489
Private Company Value
$5,250,734
Present Value (What the Owner Keeps)
$5,250,734
60.00%
Financing (What the Investor Gets)
$3,500,000
40.00%
Total
$8,750,734
100.00%
I hope this helps!
Hi everyone
- Hi everyone.I am Alex,SEO Analyst on XSEO Company.Nice forum.
Protect yourself from Hackers
- I received this from a newsletter from FXpro that I subscribed to. Please read and apply
In the 21st Century internet is widely used for everyday job. Despite the "ease" and free time offered from internet use, one should be aware of the dangers and be prepared to avoid and safeguard him/herself from any attacks his/her computer may accept or even from the "unwanted" e-mails received.
Golden Rules of Protection
When using the internet make sure you have an antivirus program installed in order to avoid intrusions in your Computer,
If you are using wireless internet connection make sure you have your connection locked,
Do not save any official documents on your Computer, such as Copy of Passport, ID, Bank account numbers, copy of cards in case your Computer is hacked or even stolen,
Keep all access codes/passwords in a safe place,
Do not share an e-mail address with any person,
Do not reveal any access codes, passwords to any person,
If you are using a public Computer, ie in an internet cafe, make sure you log out any internet sites you have visited before leaving and deleting the cookies in order to minimize the risk of someone following your tracks,
Regularly change your passwords on your e-mail accounts, or any other account that requires passwords,
Be careful of e-mails received. Always check the e-mail address and in case you believe that this does not come from a person, Company, Organization you might be dealing with always send an e-mail to an e-mail address stated on the person's business card, Company's, Organization website requesting them to confirm that the e-mail address on the e-mail received belongs to them, before you reveal any information,
Always have in mind that an established Company/Organization never uses an e-mail address such as g-mail, yahoo, hotmail etc thus always be careful when you are receiving such e-mails, even if it appears to be from a Company/Organization you are dealing with,
Always remember that a Company or Organization will never require you to send them your login/password/access codes,
When using a website that requires an access code, do not allow the browser to remember your passwords
Business magazines
- Fast Company is pretty good if you're into technology although it can be very on the edge.
Entrepreneur has become one giant advertisement and I cancelled my subscription.
Selling Power also has some useful content if you're looking at improving your sales skills / presentations.
Hi Everyone!!
- My name is kumar and owner of an SEO Company . I started my business in 2007 and now doing business with 300 websites and recently added a new services for video creation/ seo .
I love to to share and gain knowlege with people and discuss about business .
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