Posted on Mar 09, 2017
Business Structures
When a person decides they want to open their own business, they need to determine what type of structure it’s going to take.
Will it be an unincorporated business or an incorporated company?
Not too difficult! Only two choices up for grabs.
So, let’s explore what the difference between the two is.
Sole Proprietorship
If you’re an unincorporated business, and you’re a one-man show, you are known as a sole proprietorship.
With this type of structure, there is no separation between you and your business. As in, YOU AND THE BUSINESS ARE ONE AND THE SAME. You are the business; the business is you.
You own 100% of all the good stuff (profits). You own 100% of all the bad stuff (losses/debts/liabilities).
All profits and losses are reported on your personal tax return. Profits are treated as income and are taxed at your personal tax rate, while losses can be used to offset (reduce) other forms of income. This in turn reduces your taxes payable. So, there’s good and bad here!
Because there is no difference between the you and your business, from a legal standpoint, you are personally on the hook for all the debts of your business. So, if a vendor or customer sues you, your personal assets (cash, house, car) are up for grabs. Uh oh!!
Partnership
If you’re unincorporated, and there is more than one person, it’s called a partnership.
This type of structure is no different than a sole proprietorship other than you have someone to share the good, the bad, and the ugly with!
If you make money, you share that windfall with your partner(s). If you have debts, you share the burden of debt with your partner(s).
Most partnerships are classified as a General Partnership. Under this structure, everybody shares everything.
Under a Limited Partnership structure, you can contribute financially to a partnership without being involved in the day to day activities of that partnership. As a limited partner, you are only responsible for the debts of the business up to the amount you’ve invested. However, you must maintain your “hands off” approach in order for it to stay that way. When a limited partner becomes involved in the day to day activities, the structure of the partnership changes to that of a General Partnership.
If you are an accountant, lawyer, or doctor, you can form a Limited Liability Partnership. There are rules that govern this type of business structure, sooooooo…..guess who you have to talk to?
Ya, your lawyer or accountant.
Corporation
A corporation IS its own separate “person”. So, when your corporation is set up, the liability transfers from you personally (in most cases) to the business. As in, there IS a separation between you and your business.
The incorporation process is more expensive than the other two structures mentioned above. You need to get a lawyer involved to get all the paperwork in order, so be aware, it’ll cost you some bucks if you go down this path.
From a tax standpoint, a corporation has its own tax rate, and files its own tax return.
Co-Operative
The least common of all business structures is called a Co-operative. A Co-op is an incorporated business that is owned by it’s members. Under this structure, members pool their resources together to meet a common need or goal. By doing so, members are able to accomplish things they may not have been able to accomplish on their own.
Get your lawyer and accountant involved
When it comes to choosing the right business structure, you need to consider many things. You may start out as one structure then grow into another. Your accountant or lawyer will be able to help you make the right decision at the right time.
Karen
