Your Profits and Business Stucture!

Many entrepreneurs assume they will be successful and choose an inappropriate definition of their business structure. This leads to headaches and excess expenses. Basically, there are three legal structures for your business: sole proprietorship, partnerships and corporations.

We will begin with the simplest and most common format that of sole proprietorship.

Sole Proprietorship

This is the most sensible one for someone who is just starting off their business. This is an individual who is personally responsible for the financial aspect of the business and is doing business as. All revenues are taxed and all liabilities or negligence arising from the business operations are your primary responsibility. This is usually a one man/woman show, even though you can have employees working for you.

You can run the company under your own name or a fictitious name. In some states you must have a fictitious certificate. Also some states require that you acquire licenses and zoning occupancy permits and tax registrations.

If you establish a sole proprietorship, all the assets of the business are owned immediately by you. You control the business. You may hire employees to help you but ultimately you are the sole responsible for the legal responsibilities and for any decisions made by you or your employees. It is always advisable to open another account as a business or commercial account to manage and run your business. Mixing both accounts makes it practically impossible to keep track of revenues, expenses, liabilities or other costs related and accrued to your business.

A sole proprietorship can sell or transfer their business at any time. The business exists as long as the owner is alive and continues with the business. Once portion of the assets or its entirety are sold then the business ceases to exist. You are taxed on the entirety of your income. You are liable for paying self employed tax on the income tax.

Partnerships

Some individuals like to run their business as partners where two or more professionals decide to bring their business expertise to the table. We can form two types of partnerships: general partnerships and limited partnerships. A general partnership is established when two or more individuals jointly own the assets, liabilities, revenues and losses. There are two good reasons for doing this.

One is that tax allowances are given to each partner and the second reason is that each partner has legal ownership of any business assets.

A limited partnership entails one or more general partners who are generally legally responsible for the business and one or more limited partners who have limited liability according to the state's statutes and those obligations stipulated in the agreements.

It is recommendable to begin the agreement attending some overall issues such as leadership styles; who and how decisions are made; allocation of moneys, profits and losses; investment proportions; and if not investing with money than with what. How much time will be given to the company; the duration of agreement; if want to sell out; how will each partner pay themselves when they cannot take salary.

In the case of Limited Partners, they don't maintain personal liability for the business of the partnership. Limited partners are bound by the previously agreed-upon contributions to the partnership and only to this extent are they at risk.

Any unmet loans, obligations or creditors can come after the entire partnership by having its assets sold. They also may seek out all or any of the partners into bankruptcy, in order to force the sale of their personal property.

To make matters worse, creditors may elect file bankruptcy orders against individual partners. When businesses take on spouses as partners, there are tax savings but if they find themselves in bankruptcy then they could be hit with heavy losses affecting personal properties and assets. Again this varies from state to state and country -international law.

All income is taxed to the extent of each partner's ownership. There is no limited liability and also no double taxation. Partners must also pay self-employment tax on their partnership income.

Corporations

A corporation has certain advantages over a partnership and sole proprietorship that make it attractive. At the same time keep in mind that it is more of a complex business format. It is the most sensible format for a larger business.

A corporation is a separate legal entity. It is responsible for its own debts and personal assets aren't touched. Compliance with certain formalities is necessary. Doctors, lawyers and other professionals who practice as a business are required to do business as a corporation.

Before pursuing with this set up, one needs to address some principals. These issues need to agreed upon and reflected on the agreement prior to filing articles of incorporation with the state: Majority votes and stockholders, number of issuing shares, money invested as well as property to create the corporation; the business purpose, mission statement and business plan. Now you can proceed to file at the state office and an initial fee for filing the corporate documents. Don't be alarmed when you realize that there is an annual fee running your corporation.

With increase in volume, we have learned that prices go down. Well the bigger the company, the corporate structure offers better employee benefits, such as health insurance premiums and group life insurance premiums. Pension and retirement plan options are about the same.

The corporate tax rates are lower at higher income brackets versus those of sole proprietorship or partnership. You are also able to reinvest a lot more inside the company and get better tax deductions. Unfortunately, you are also taxed twice, once for taxable revenues and secondly on the dividends you receive.

Whatever business format is finally implemented, there will come a time when personal assets might need to be used as collateral for a loan. It just is wise to be aware and completely attuned to what is being put at risk, no decision is your final decision. You can always change your mind, just "CYA" - Cover your ass.