Reprinted from Under 30 CEO. Original article here.
By Carlene Masker
Success is a ladder that cannot be climbed with your hands in the pocket. A successful business venture is no different in this regard. Hard work, proper planning and smart thinking are the key to a successful business. This article is a guide to business standards and structures for rising entrepreneurs.
In US, the most reputed form of business structures are general partnership, corporation, Individual proprietorship and LLC (Limited Liability Company). Each of these structures has its own merits and demerits in terms of complexity, security, taxation, expenses and other factors. You must have a thorough understanding of how each structure works to emerge as an entrepreneur.
Let’s get into more details on the structures.
When two or more individuals join hands to make profit through business entrepreneurship, it is popularly termed as a partnership. Partnerships can be formed so easily by a simple handshake or an oral agreement. However, it is always good to operate a partnership after a written agreement. A partnership offers relatively simple operation, organization and flexibility that multiple owners can afford to enjoy. One has to bear in mind that partnership is a form of business that is more likely to result in lawsuits and disputes because of its easy formation and informality.
Advantages of partnering
-Easy and Inexpensive
-Fewer formalities and no annual meetings.
-Favorable taxation to small business setups
-Unlike LLC and Corporation, partnership does not demand minimum taxes
-You are personally liable to losses, debts and liabilities.
-You also have to bear responsibility for the other partners’ actions
-Badly organized partnerships can lead to disputes and lawsuits.
Individual proprietorships are the humblest form of business. This form of business is not a legal entity as it refers to individuals that own business and are personally responsible for its outcome. An individual proprietorship can operate under trade names or its owner’s names. This form of business is simple, easy to setup and incurs nominal expenses. The owners typically sign contracts in their own names as individual proprietorships has no independent identity under the law.
Advantages of Individual proprietorships
-Owners can setup individual proprietorships quickly, easily and without having to spend too much.
-Very little formalities
-Personal and business assets can be mixed freely without a concern for a partner’s consent.
-No unemployment tax on owners (might have to pay for their employees).
Disadvantages of individual proprietorships
-Owners are liable to risks like debts and losses.
-Owners will not be able to raise funds by selling interest in the business.
-Does not have the strength to survive incapacity of the owner.
Limited Liability Company (LLC)
This is the newest form of business structure in the US. It is a hybrid business structure that features liability corporate protection as well as ease of administration and tax treatment of that of a partnership structure. The best thing is that it offers liability protection to owners for organization liabilities and debts. A big disadvantage of LLC is the troublesome range of formalities observed by corporate managers.
Advantages of LLC structure
-Does not require annual meetings and has to fulfill very few formalities
-Owners are protected from company debts, individual liability and other obligations
-LLC boasts partnership styles and get through taxation making it favorable to many small business setups.
Disadvantages of LLC structure
-No reliable body for legal precedent to guide managers and owners. But these days LLC is becoming more and more reliable as well.
-Not a proper vehicle for business seekers to go public or raise funds in the capital markets.
-More expensive than partnerships
-Periodic filings or annual fees are usually incurred with the state
-Some states do not allow LLC formation for specific professional vocations
In the eyes of law, a corporation is a legal person that can file lawsuits, buy and sell contracts, properties, commit crimes and also be taxed. A corporation, unlike the other business setup formats, protects owners from personal liabilities for obligations and debts but has a limit. A corporation form of business is ideal for making capital investments. The shareholders, officers, directors, managers and other corporate heads need to observe specific formalities in running the administration and operation.
Advantages of a corporation
-Protection from personal liabilities like obligations and company debts
-Consists of a reliable group of legal precedents to help managers and owners
-Best choice for switching to public companies
-Easy to raise funds by selling securities
-Transfer ownership via transfer of securities
-Can make tax benefits under favorable circumstances
Disadvantages of corporations
-Requires annual meetings while directors and owners have to undergo certain formalities
-They are more expensive to setup
-Need annual charges and routine filings with the state.
Depending on the nature of your business, your budget, the strength of your employees and your ability, you can choose one of the above structures for your business setup. Whatever you take up, bear in mind, that a business is half sport and half war. Neither the former, nor the latter can be successful without planning and hard work.
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