“In this world, nothing can be said to be certain, except death and taxes.” This has proven to be an exceedingly accurate observation by Benjamin Franklin when he offered his perspectives about the newly minted U.S. Constitution in a letter back in 1789. While it may not be the sexiest aspect of starting a new business, tax planning should be a key consideration when you’re working through your strategy. For example, to move forward with many business requirements, you’ll need to adhere to regulations like getting a tax ID number, and even applying for various licenses or permits, all of which are dictated by the type of business you’re building.
That’s already a dizzying prospect, which is further compounded by having to decide which legal structure best suits your small business. Each framework will impact the ability to run your business in different ways, so it’s essential to weigh all the pros and cons. For instance, taxes, paperwork, liability, and even financing options like this loan from small business-centric lenders are all affected by the legal structure you establish for your business. You’ll be unable to register your business until you set up the legal structure, and there are even cases where some structures aren’t permitted.
This is definitely a tricky landscape you don’t need to navigate on your own. It’s worth reaching out to professionals at the outset to save yourself the heartache of future complications or entanglements that could hurt your business. Even though it’s highly recommended to get input from the experts when setting up your business, it always helps to start with some background on the existing legal structures, so you understand your options.
A sole proprietorship is the most straightforward legal structure. It’s fairly self-explanatory, with the business owned by a single individual without any legally recognized segregation between the enterprise and the owner. While easy to set up and manage, there are a few major drawbacks like liability issues and fewer financing levers.
Limited Liability Company
A Limited Liability Company or LLC is almost a hybrid of sorts. In this legal structure, the owner achieves the separation that protects personal assets in the event the company goes bankrupt or is the subject of litigation. Corporate tax rates are bypassed as profits and losses can be claimed as personal income.
If a small business has multiple owners, forming a partnership is another possible option when choosing a legal structure. Formal agreements establish the nature of partnership, whether it’s a Limited Partnership (LP) or a Limited Liability Partnership (LLP). Tax and liability implications vary depending on which version is set up. But then, it’s similar to the LLC and sole proprietorship in that corporate tax rates can be avoided since profit and loss are eligible as personal income.
There are several types of corporations that a small business can select within that legal structure.
Some nuances differentiate the various corporation classifications, but they all share the distinction of being legally and financially separate entities from the owners. Corporations tend to be the most heavily regulated because of the introduction of shareholders and the requisite reporting that follows.
Multiple groups are invested in the success of the small business owner in America. Small businesses are a proven economic growth engine in every community across the country, so there’s no shortage of tools and resources to help you get started. Websites like the U.S. Small Business Administration lay out the steps, and can even recommend counselors that will help you protect your interests by setting up the most appropriate legal structure. Don’t hesitate to reach out for peace of mind, so you can focus your energy on your future endeavors.