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Editor’s note: This guest post written by M. Garcia of Arizona Legal Briefcase
There are many ways to structure your new business, so it is very important for you to determine which structure is best for you and your new business. You have several options when starting your new company. Your choices are to form a corporation, an LLC (Limited Liability Company), a partnership, or a sole proprietorship. Your choice will depend on who will own the business and what its activities will be.
Preliminary Questions when Starting a Business
You will need to determine which one is the best fit for your new business. This is an important decision. You will need to ask yourself some questions to help you determine which business structure will work for your new business. Keep in mind that what might work for your friends?
Company might not work for you. Ask yourself:
– Will I be the sole owner or will I have partners?
– What is the financial situation of my new business?
– What are the potential risks and liabilities of my new business?
– What expenses are involved in establishing and maintaining my business?
– What is my income tax situation?
– What are my investment needs?
Determine Your Business Risks
Businesses offering services differ from those selling products. Some businesses require that your company be bonded, such as tree removal. These businesses carry a high risk of being sued for damages; therefore, you will want to form your business so that you have personal liability protection. Corporations and LLCs offer the best protection for these types of businesses as they shield your personal assets from your business debts and claims. While you could lose your business, you would not lose your home or other personal assets.
Weigh the Pros & Cons of Each Business Type
There are pros and cons to each business type. Some business types are easy to set up and run, such as a sole proprietorship or partnership. There are no special forms to file or fees to pay in order to start your business, other than obtaining a business license. In addition, there are no special rules to follow when running your business. Therefore, if your business does not require that you be bonded or that you obtain any special insurance, then establishing your business as a sole proprietorship (if you will be running the business by yourself) and partnerships (if you will have one or more partner) will be your best bet.
Forming an LLC or Corporation
If you form an LLC or a corporation, you will spend more money and have more paperwork to file. There are also rules that you must follow when running an LLC or a corporation, such as electing officers to run the company. Most states require a minimum of a president, vice president, and a secretary. You must keep records of your business decisions.
The Effects of Income Taxes
Then there are the income taxes to consider. With a sole proprietorship, a partnership, or an LLC, you are taxed the same way. Considered ?pass-through? tax entities, these businesses pass the profits and losses through the business directly to the owners. The owners then report the profits and losses on their personal income tax returns. That means no double taxation on the business profits as taxes are only paid once and less tax paperwork to keep up with. However, you are required to report all of the business?s net profits on your taxes regardless of how much or little money they actually take out of the business.With a corporation, the corporation must file a separate tax return and will pay taxes at a special corporate tax rate on the net profits. The owners will then pay taxes only on monies received from the corporation in the form of salaries, bonuses, and dividends. The corporate tax rate is lower than the individual tax rate for the first $50,000 to $75,000.
What about Stock Sales?
Establishing your business as a corporation will allow you to sell ownership shares in the company through a stock offering. This will make it easier to raise the investment capital that you need and can be an incentive when hiring employees by issuing employee stock options. However, if you never plan to issue stock, then forming a corporation most likely isn’t the best option for you due to the added expenses and paperwork required.Perhaps you are asking yourself, what happens if my business needs change and my initial business type decision no longer works for my company? You do have the right to convert your business to another type later. Therefore, if you are still uncertain as to which type of business to form, pick the simplest one that appears to suit your needs at this time knowing that you can change it later.
About the Author: M. Garcia is a representative of Arizona Legal Briefcase . She and her team have the ability to file small business formation documents in Arizona, including LLC?s, LLP?s, and other corporations.
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