Starting Your Own Business: From Sole Proprietorship to Multinational Corporation

Can you do it alone or do you need an organization?

sole-corporationNow that you are ready to launch your own business and wrote the One Page Business Plan, you are trying to decide what type of legal structure you need for your new company. This could be one of the most important decisions at the beginning since choosing the right structure can help you improve your company recognition, and to safeguard your assets in case of a future dispute. From sole proprietorship to multinational corporation, there are five primary organizational structures recognized by the U.S. Tax authority the Internal Revenue Service (IRS).

U.S. Business Structures:

  • Sole Proprietorships
  • Partnerships
  • Limited Liability Company (LLC)
  • S Corporations
  • Corporations

Sole Proprietorship

A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities.You do not have to take any formal action to form a sole proprietorship. But like all businesses, you need to obtain the necessary licenses and permits. Regulations vary by industry, state and locality.

Advantages of a Sole Proprietorship

  • Easy and inexpensive to form
  • Complete control
  • Easy tax preparation

Disadvantages of a Proprietorship

  • Unlimited personal liability
  • Hard to raise money.
  • Banks are also hesitant to lend to a sole proprietorship.

Partnership

partnershipsA partnership is a single business where two or more people share ownership. Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business. Although partnership agreements are not legally required, they are strongly recommended and it is considered extremely risky to operate without one.

To form a partnership you must:

  • Register your business with your state
  • Register your business name
  • Obtain business licenses and permits
Advantages of a Partnership
  • Easy and Inexpensive to form
  • Shared Financial Commitment
  • Complementary Skills
Disadvantages of a Partnership
  • Joint and Individual Liability
  • Disagreements Among Partners
  • Shared Profits

Limited Liability Company (LLC)

A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.The “owners” of an LLC are referred to as “members.” Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs.

To form a LLC you must:

  • Choose a Business Name
  • File the Articles of the Organization
  • Create the Operating Agreement
  • Obtain business licenses and permits

Advantages of a LLC

  • Limited Liability
  • Less Recordkeeping
  • Sharing of Profits
Disadvantages of a LLC
  • Needs to be reformed to allow members to join or leave
  • Self-Employment Taxes

S. Corporation

An S corporation (sometimes referred to as an S Corp) is a special type of corporation created through an IRS tax election. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation. What makes the S corp different from a traditional corporation (C corp) is that profits and losses can pass through to the your personal tax return. Consequently, the business is not taxed itself. Only the shareholders are taxed.

To form a S Corporation you must:

  • Choose a Business Name
  • File as a Corporation with your state
  • Select the S Corporation Model
  • Obtain Business Licenses and Permits

Advantages of a S Corporation

  • Tax Savings
  • Business Expense Tax Credits
  • Independent LIfe

Disadvantages of a S Corporation

  • Formal Operating Processes
  • Shareholder Compensation Requirements

Corporation

Courtesy of impawards.com

Courtesy of impawards.com

A corporation is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs. Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees.

To form a Corporation you must:

  • Choose a Business Name
  • File as a Corporation with your state
  • Obtain Business Licenses and Permits

Advantages of a Corporation

  • Limited Liability
  • Generate Capital through the sale of Shares
  • Corporate Tax treatment
  • More attractive to employees

Disadvantages of a S Corporation

  • Formal Operating Processes
  • Double Taxation (the corporation is taxed on whatever is distributed to shareholders after paying all expenses)
  • Additional Paperwork

Now that you know all of the different legal organizational structures in the U.S. you need to decide which one is the most appropriate for your particular business. People that may have very few or no employees may benefit from a sole proprietorship model, lawyers are not allowed to form corporations and must select the partnership model, and almost everybody else can choose between the different models. If you are not sure about which organizational model is the best for you we can work with you in order to help you determine which model can better meet your needs.

About Inloso

Inloso offers strategic business consulting in Latin America and the U.S., in the areas of multinational strategic business development, multinational operations, and entrepreneurship. We have over 20 years of experience and can help you expand your business, improve your profits and customer satisfaction, and/or reduce your costs of operations. Please visit our contact page if you are interested in our assistance in any of these areas.

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