Starting a new business can be a huge undertaking. One of the most important and first decisions that you need to make is to decide how it will be structured. This will determine the type of taxes you have to pay, as well as the type of paperwork and the amount of it that you will have to complete. Working with a tax professional, such as 1-2-3 Financial Services in Warwick, RI, you can weigh your options based on your particular business and your financial goals.
Here are a few of the criteria to consider as you make your decision. After all, the choice of structure needs to be based on the situation and the plans for the business itself in the long term.
Deciding What Suits You Best
Here are just a few criteria to reflect on when determining the best decision for your business. Keep in mind that you need to determine the type of business you will be opening before you choose your business entity, as that may indicate what type of liability you are willing to incur.
Legal Liability – What type of insulation do you need from legal liability?
Tax Implications – What type will assist in reducing your tax burden or other tax liabilities? More tax options are available for those who choose corporations than with the other options. Double taxation can be avoided with an S corporation is just one example.
Costs for forming and maintaining the entity – Corporations take more to form and require specific paperwork to be filed on a regular basis with the state to maintain your status as a corporation. The other entities can cost significantly less in terms of set-up and overall upkeep.
Flexibility – Maximizing the flexibility of your ownership should be considered, as well as your business’ unique needs and the needs of the owners. No two situations are alike, so it is best to weigh all the needs of the individuals involved before making a decision.
Future Needs – What do you think your business will need in the future? If there are changes to ownership, what will that mean for the business? Looking at what the business might be achieving in a few years should also be factored into your decision.
The Types of Business Structures Available
Partnership – Typically involving two or more individuals agreeing to share the benefits and potential losses of a business venture. This structure does not bear a tax burden for profits and the other benefits of losses-profits are passed through to the partners’ individual tax returns. A disadvantage is that each partner also shares liability for any financial obligations incurred by the business.
Sole Proprietorship – A common form of business organization, because it is easy to form and offers complete control for the owner. But it also makes the owner financially liable for all obligations of the business itself.
Corporation – A legal entity that is created to conduct a variety of businesses. The corporation is separate from the individuals who founded it. The corporation can be held legally liable for its actions. It can also make a profit. The advantage is that it is a shield against personal liability. Disadvantages include the costs of forming the corporation, as well as extensive record keeping. Double taxation is avoided by passing the income or losses to individuals, just as in a partnership, but this is only for the S corporation, which is a variation of the regular C corporation.
Limited Liability Company (LLC) – A hybrid of a partnership and a corporation, it allows owners to take advantages of the benefits of both. Profits and losses can be passed through to the owners without taxation of the business itself, but the owners are shielded from personal liability. Thus, this provides the best of both worlds, but also comes with increased paperwork beyond a partnership.
For every new business, there are a myriad of decisions weighing on the decision of a business structure. A business plan assists in helping you to understand the best type of business entity will work for your long term goals. While not every business will find the perfect structural fit, there are certainly a few options that provide their own unique benefits, but also some specific weaknesses.
Click on the link below to be put in contact with one of the tax professionals at 1-2-3 Financial Services in Warwick, RI, where they can assist you in weighing the tax implications of various structures, as well as keeping your books and even discussing how to handle payroll or other tax liability.
1-2-3 Financial Services, Inc.