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Legal Structure & Its Implications
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Posted On: Tuesday January 13th, 2004 at 12:00am EST
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CAPSULE
What is the best legal structure for my business?
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One of the first issues you will face is to decide the legal structure of your business.
A business can be organized in one of three basic legal forms, Sole Proprietorship,
Partnership, and Corporation. To determine what's best for you, an understanding of
them and their advantages/disadvantages is required.
What legal form should my business take?
This might be one of the very first questions
you have to answer when starting your business. There is no right or wrong answer.
The key is to understand the available options and determine what best fits your needs.
A business can be organized in one of three legal forms, Sole Proprietorship, Partnership,
and Corporation. There are also variations to these three basic forms. Listed below are
some of the most important issues you should consider in order to make an intelligent decision.
Other determining factors may include required capital, management and financial control,
management and technical expertise, duration of the business, and your willingness to take risk.
| Most Influencing Factors |
| 1 | Easiness/Cost for setting up the business |
| 2 | Liabilities |
| 3 | Taxes |
| Business Formation |
Easiness/Cost |
Liability |
Taxes |
| Sole Proprietorship |
Easiest and least expensive |
Unlimited liability, owner personally liable for business debts and court judgments against the business. |
Owner reports expenses, and profile/loss as part of his or her personal tax return. Losses can be used to offset any income earned from other sources. |
| Partnership |
Relatively easy and inexpensive |
Unlimited liability, partners are personally liable for business debts and court judgments against the business. |
Although the partnership files a separate tax return, generally there's no income tax due. A partner reports his or her share
of the partnership's income or loss on his or her tax return. Losses can be used to offset any income earned from other sources. |
| Corporation |
Most complex and expensive |
Limited liability, stockholders are not personally liable for claims against the corporation. Their losses are limited to the amount they paid for the stocks. |
Double taxation, taxes are levied on corporation profits when they entity files its own return.
The stockholders will be taxed again when dividends are distributed to them. Shareholders cannot deduct any loss of the corporation. |
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