Medium and Small Scale Enterprises are the roots that empower the economy and employment of every country. Unlike big firms, these small businesses don’t have think tanks that can render valuable advices. For each such step related to incorporation of businesses, owners look for correct guidance. One of such important question that is frequently asked is about the best business structure for small businesses.
There are various kinds of business structures in the USA like Limited Liability Company, Sole Proprietorship, Partnership Firm, etc. But the question arises which business structure will suit your small business and would be beneficial to you.
Most popular legal formations for small businesses are as follows:
A sole proprietorship business is basically a one man show where there is no difference between the owner and the business. The owner is the sole person responsible for any kind of liability arising out of the business. Many small businesses prefer to go for sole proprietorship as it is the most easiest and cheap method of starting a business.
In such business, you have advantage while paying taxes, preparing taxation documents and managing business because of simplicity. It also makes your complete control over the firm in case of decision making and benefiting with the profit arising out of it.
There are some disadvantages like: Your business and you are same in legal terms which means that in case your business suffers any loss then you will directly be responsible. There is unlimited liability on your head and your property is also on the risk in case of bankruptcy and lawsuit.
Limited Liability Company
A limited liability company or LLC is a hybrid version of sole proprietorship and corporation. A LLC minimizes the liability that is put up on the members of the company. LLC protects you from personal liability that arises in case of bankruptcy or lawsuit. Your home, personal assets, vehicles and other such assets won’t be at risk.
But there are also some risks involved here like you will be held liable if there is a lawsuit filed against you. Also, LLC formation is an expensive business in comparison to sole proprietorship. To add more, you will have to pay self-employment tax on your earnings and shares.
Partnership firm as the name suggest is a type of legal entity where two or more people in a partnership own and manage the business. There are two types of partnerships namely limited partnership and limited liability partnership or LLP.
In limited partnership, only one partner has to bear unlimited liability while the rest have limited liability. Partners with limited liability also have limited control over the company while the partner with unlimited liability has better control over the firm.
Limited liability partnership is where each of such partners have limited liability against any kind of loss. They also have their limited say in the company. In LLP, other partners won’t be held responsible for the debt of other partner.
What type of corporation is best for your small business?
Your choice of legal entity should be based on the type of business you are willing to operate, its investment, its expected turnover, etc. The choice should be based entirely on the situation of your business. For this, you can hire an expert who will help you in taking the right call.
A fine study of your proposed business will yield the correct answer. Of all three, each of them come with some advantages and disadvantages. Your choice should be the one that gives you maximum advantage and least disadvantage.
Small businesses have low capital investment which means the cost management should be low. Incorporation of business is costlier and also hiring advisors and tax consultants is also expensive in nature. Thus your choice of entity should care about such issues that will matter while you are running your business.
Regarding liability, what if your business fails? Will you be ready to risk all your personal property or will you avoid such liability? Bankruptcy in business often leads to fall of business and the owner has to compensate from his property. This can sometimes be extremely expensive. Thus your choice should be the one that minimises your liability in case your business fails.
Some points to remember
It is important to decide whether you want full autonomy over your business or you want your shareholders or other partners to take joint decisions. Your choice of legal entity will decide your call.
Whether you want to be full responsible for any kind of liability and have maximum say in the business or you want a balance situation where you have limited liability and limited say in the business. It will depend highly on the entity you choose.
Expense in Incorporation:
Some legal entities and their incorporation is cheap while some are expensive. For small businesses it is often said that the expense should be reduced in maximum way possible. Thus an entity that is expensive in nature and is complex should better be avoided.
All kinds of legal entities have different methods of taxation mechanism and your choice should entirely be based on the pros. Self-employment tax is charged based on earnings from shares in LLC while tax is charged only on the wages paid to the employees. In some cases, sole proprietorship and corporation is beneficial while in some LLC is better.
There are also various rules and sanctions on various issues like transfer of business, insolvency, bankruptcy, etc. Payment of taxes, maintaining the business accounts, etc. are also very complex jobs based on your choice of legal entity.
In case you choose to wind up your business then which legal entity can offer you with ease? Which legal entity reduces your paper work should define your choice? Remember, a good percentage of your success depends upon the choice of your legal entity.
Consult a tax professional who is well versed in this field to give your advice based on your business venture. Your decision should be extremely thought off and should interest your business. Take the correct call and your business will flourish.