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Legal Structures for Business ... What Legal Structure is Right for Your Home Based Business?

What Type of Legal Structures for Business Will You Choose?

Become familiar with the legal structures for business...

Your choice of one of these business organizational structures depends on your personal goals and other financial factors.

Prepare to talk to your accountant and attorney...Review the following outlines...They will assist you in determining what type of legal structure is right for your business.

The most common small business structure for home based businesses is by far a Sole Proprietorship...however, before deciding on what's best for you, talk with your accountant and attorney...Get their professional advice early...

Avoid liability in the future.

Should I establish a business entity?...

That's a question that seems to arise quite frequently in many of the forums I've visited recently. Of course, our answer is "Yes, depending on the amount of personal protection you require."

By establishing a legal business entity you can protect your personal assets. Discuss this matter carefully with both your accountant and your attorney.

Where should I register my business?..

Good Question! ...Of course, you have numerous choices, but we suggest you ask your accountant and attorney if registering in Nevada is a good option for you. Nevada offers some protection that other states don't...You can learn more at their website.

Find Out More --How to Form Your Corporation or LLC Now

Basic Legal Structures for Business

(Scroll Down For Charts)

Sole Proprietorship: This is the simplest form of business structure.

As it's name implies, ownership rests with one individual. You will have total control. You will be personally responsible for all business debts, and you will keep all profits.

There are no legal formalities required to establish this type of structure, however you may be required to obtain a business license. (Be sure to comply with local ordinances, when operating out of your home.--Learn the 7 Steps to Starting a Business)

Advantages of a Sole Proprietorship	Disadvantages
Easy to Establish, Least Expensive	You are Personally Liable for all debts
Total Control, Ownership	More difficult to borrow money or encourage outside investment
File Taxes on Personal Return	You are the business-If something happens to you, it happens to your business.
No Double Taxation	You are fully responsible for day-to-day management
No Periodic Reporting	You must pay self-employment taxes on profits
All Profits belong to You

Partnership: Ownership is shared between two or more partners.

There are two partnership types:

General Partnership: The most common partnership type.

Two or more partners, form this structure by a legal contract. Each are fully involved in the business, and share both profits and liabilities.

Limited Liability Partnership: Each partner's liability is limited to the amount of their individual investment in the partnership.

In this type of structure, at least one general partner must remain liable for all debts of the partnership.

Partnerships offer some great advantages, including spreading the risk and creating an opportunity to leverage each partners expertise...however, there are some disadvantages you should consider carefully. As a general partner, you would have unlimited liability for the business; as a limited partner, you are liable for the debts of the business, if you are an active manager.( Always obtain legal advice when considering a partnership.)

Advantages of a Partnership	Disadvantages
Leverage You and Your Partners Talents	Can be complex to structure. (Obtain legal advice)
Partnership does not Pay Federal Taxes - You file and form 1065 showing pass through income you and your partner earn	Problems may arise between you and your partner
Investment Capital can come from Partners, as a loan to the Partnership, They earn interest, the partnership deducts the expense.	You may be liable for commitments your partners make. (General partners are liable for all debts and obligations; Limited Partners are liable if they are active managers.)
Liability is spread between partners

Corporation: By far the most complicated legal business structure.

There are 3 major types of corporations, the C-Corporation (also referred to as a Regular Corporation), the S-Corporation, and the Limited Liability Corporation. (If you are considering this type of structure, always obtain legal advice.)

Every state regulates incorporation and laws vary widely.You can contact the Office of the Secretary of State or find the appropriate office in your state for additional information.

Each corporate structure requires good record-keeping and oftentimes, complex tasks requiring the services of an accountant.

Legal fees will vary, however you can expect to pay between $350 and $1500 to set up this type of structure.

C-Corporation: A taxable entity-resulting in "double taxation".

The corporation is taxed on the profits it earns, then you as the shareholder (owner) pay taxes on the dividends the corporation pays you.

Dividends paid to shareholders are not deductible to the corporation. (We consider this the biggest disadvantage of forming this type of business structure.)

The biggest advantage to incorporating is establishing credit, both with your suppliers and with banks. If you want to raise capital with outside investors, incorporating is a vital step. Secondly, you, as the shareholder, have limited liability.

INCORPORATE NOW for only $139

Advantages of C-Corp	Disadvantages
Shareholders personal liability is limited	Most Expensive & Complex to set up
Business capital can be easier to obtain	An Accountant should be used to prepare Tax Returns
You can divide profits among shareholders and the Corp, to take advantage of lower tax rates	Double Taxation (Corp. pay taxes on profits, owner pays personal taxes on dividends)
Corporation exists beyond the life of the shareholders	Annual Corp. Fees
Tax benefits when Corp. provides employee benefit plans	Profits over $75,000 are taxed at higher rate.
70% of dividends paid from stock investment to shareholders is deductible (unless purchased with borrowed money)	Business losses not deductible by the Corporation
	If the Corp. profits equal more than $250,000, it will pay 28% as an accumulated earnings tax on all amounts over that threshold.

S-Corporation: This type of corporation does NOT pay Federal taxes, and provides the advantage of limited liability to shareholders.

The profits and losses of this business type are passed to the shareholders, therefore, there is no double taxation.

You, as the shareholder have the advantage of personal limited liability, as with a regular corporation.

INCORPORATE NOW for only $139

Advantages of an S-Corp	Disadvantages
Shareholders personal liability is limited as in C-Corp	Legal Assistance is required to establish
The Corp pays no Federal Income taxes, and no state taxes in most states	There may be a maximum of 75 shareholders
All profit and losses are passed to Shareholders- No double taxation	One class of common stock may be issued. No preferred stocks are permitted.
Corporation exists beyond the life of the shareholders
Wholly owned subsidiaries are allowed

Limited Liability Corporation (LLC): This structure offers tax advantages, similar to those of a partnership, and the limited liability of a C-corp. You can deduct losses on your personal tax return.

(This business structure is worth discussing with your professional advisors.)

Advantages of LLC	Disadvantages
Limited personal liability	Legal assistance required to establish. Complex paperwork
Pays no Federal Taxes	No "continuity of life", the LLC dissolves if one of the owners dies or leaves. This can be overcome with a formal operating agreement, between owners.
No limit on the number of shareholders	Some states require more that one member
More than one class of stock may be issued
Business losses may be deducted on your personal tax return

You can take advantage of one of the best online legal services, to help you decide which legal structures for business is right for you. This link below will take you right to LegalZoom.

Here's How to Form Your Corporation or LLC Now

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