Project Description

A business structure is a category of organization that is legally recognized in a given jurisdiction and characterized by the legal definition of that particular category. Of all the decisions you’ll make when starting a new enterprise, probably none is more far reaching than that of the legal structure you select for your company.

Not only will this decision have a direct impact on how much you pay in taxes, but it will affect the amount of paperwork your business is legally required to do, the personal liability you face from the activities of the business, and your ability to raise capital.

The most common forms of business structures are sole proprietorship, partnership, corporation, and S corporation. The more recent evolutions to these business forms are the limited liability company (LLC) and the limited liability partnership (LLP). Because each business structure comes with different tax consequences, you will want to make your selection wisely and choose the structure that most closely matches your business’s immediate and foreseeable needs.

Since the business structure you choose influences everything from day-to-day operations, to taxes, to how much of your personal assets are at risk, you should choose a business structure that gives you the right balance of legal protections and benefits. You’ll need to select a business structure before you register your business with the state. Most businesses will also need to get a federal tax ID number (aka EIN) and file for the appropriate licenses and permits.

You must select your business structure carefully. Although you can convert to a different business structure in the future, there may be restrictions based on your location. This could also result in tax consequences and unintended dissolution, among other complications. Consulting with business counselors, attorneys, and accountants in advance of your decision can prove helpful. You can catch a glimpse of what it takes to find the right business structure for your enterprise by watching the video below.

Although there are several business structures to choose from, in our course, we will focus on the most utilized in the United States, which are sole proprietorship, partnership, limited liability, and corporation. We will discuss some useful information to take into consideration when determining which business structure is right for you, like the basic risks and advantages of each.

A sole proprietorship is easy to form and gives you complete control of your business. You’re automatically considered to be a sole proprietorship if you do business activities but don’t register as any other kind of business. Sole proprietorships can be a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business.

Partnerships are the simplest structure for two or more people to own a business together. There are two common kinds of partnerships: limited partnerships (LP) and limited liability partnerships (LLP), with each having its own set of advantages. Partnerships can be a good choice for businesses with multiple owners, professional groups (like attorneys), and groups who want to test their business idea before forming a more formal business.

An LLC lets you take advantage of the benefits of both the corporation and partnership business structures. LLCs can be a good choice for medium- or higher-risk businesses, owners with significant personal assets they want to be protected, and owners who want to pay a lower tax rate than they would with a corporation.

A corporation, sometimes called a C corp, is a legal entity that is separate from its owners. Corporations can make a profit, be taxed, and can be held legally liable. Corporations can be a good choice for medium- or higher-risk businesses, businesses that need to raise money, and businesses that plan to “go public” or eventually be sold.

An S corporation, sometimes called an S corp, is a special type of corporation that’s designed to avoid double taxation drawbacks of regular C corps. S corps allow profits, and some of the losses, to be passed through directly to the owners’ personal income without ever being subject to corporate tax rates. S corps can be a good choice for businesses that would otherwise be a C corp, but meet the criteria to file as an S corp.

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MELANDREW SANTOSBusiness Structures
Mr. Santos has over eight years of combined experience in the fields of finance, corporate governance, state level government work (California), as well as honorable military service (U.S. Reserves). He also carries the distinction as an alumni of Mapua University (A.S. in Engineering) and UOPX (B.S. in Business Management). The majority of his time is now spent overseeing the company he co-founded, called Co-Optrade, which is an organization dedicated to providing safe, secure, and easy access to social networking platforms, products, and services for entrepreneurs which includes access to informational tools and materials.

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