What is the appropriate legal set up for your small business? Legal structure means the type of organization of a business. Deciding on the type of your business' legal structure is important, as it will have an impact on the conduct and operation of your business, including your tax payments and personal financial obligations. The usual legal structures in business are the proprietorships, the partnership and the corporation.
Owned by one person, the sole proprietorship is simple and easy to organize. The business being personally owned by an individual, business profits are taxed as personal income of the business owner. One of the disadvantages of a proprietorship is that the owner including his assets is liable for any losses or indebtedness of the business. In a partnership, the business has two or more owners. One similarity of a sole proprietorship and a partnership is that the proprietor and the partners, the latter proportionately, assumes personal responsibility for the tax obligations and any business losses. Because the corporation is a more intricate organization than either the proprietorship or partnership, and it is also harder to put up. In a corporation, the shareholders and investors having a separate and distinct identity are shielded from any financial liabilities in excess of their investments, and are also separate when it comes to the matter of income and taxation.
S-Corporations or Single Person Corporations offer a choice for business owners who want to save money on taxes. Working as an employee of the business, they pay their income taxes according to the salary that they received. What is left of the business profit is considered as dividend due to them as the sole incorporator and this is type of income is taxed lower. With the profit separated into salary and dividend, the S-Corporation owner earns more in terms of tax savings.
Before making a choice as to the type of an organization your business would be, you should know that many businesses came from a small beginning, as sole proprietorship or a partnership. This type of business organization offers several advantages, such as little paperwork, simple permits and licensing processes, and minimum risks of losses and liabilities, and is therefore more apt for a small business.
Increased risks, debt exposures and capital requirements are signs of a successful and expanding business, and should serve notice that the business should be upgraded to corporation status, partly to protect your personal assets and partly to allow for the entry of additional capital.
Owned by one person, the sole proprietorship is simple and easy to organize. The business being personally owned by an individual, business profits are taxed as personal income of the business owner. One of the disadvantages of a proprietorship is that the owner including his assets is liable for any losses or indebtedness of the business. In a partnership, the business has two or more owners. One similarity of a sole proprietorship and a partnership is that the proprietor and the partners, the latter proportionately, assumes personal responsibility for the tax obligations and any business losses. Because the corporation is a more intricate organization than either the proprietorship or partnership, and it is also harder to put up. In a corporation, the shareholders and investors having a separate and distinct identity are shielded from any financial liabilities in excess of their investments, and are also separate when it comes to the matter of income and taxation.
S-Corporations or Single Person Corporations offer a choice for business owners who want to save money on taxes. Working as an employee of the business, they pay their income taxes according to the salary that they received. What is left of the business profit is considered as dividend due to them as the sole incorporator and this is type of income is taxed lower. With the profit separated into salary and dividend, the S-Corporation owner earns more in terms of tax savings.
Before making a choice as to the type of an organization your business would be, you should know that many businesses came from a small beginning, as sole proprietorship or a partnership. This type of business organization offers several advantages, such as little paperwork, simple permits and licensing processes, and minimum risks of losses and liabilities, and is therefore more apt for a small business.
Increased risks, debt exposures and capital requirements are signs of a successful and expanding business, and should serve notice that the business should be upgraded to corporation status, partly to protect your personal assets and partly to allow for the entry of additional capital.
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