Creating a legal business entity is a must do for operating a business. It provides your business with an individuality and separate existence. The first step to forming an entity is to know the appropriate legal business structure for your business. There are advantages and disadvantages in forming and operating any of the legal business forms. A business operated by a single person can assume the form of a Sole Proprietorship. If the business is operated by two or more persons, forming a general partnership is advisable. When only one of the business owners is actively operating the business and others are passive investors, you may form a limited partnership. These legal forms of business are simple to form and operate and do not involve too many legal formalities except for licences and registrations required for the business to operate in your state.
The main disadvantage of the above mentioned business structures are that the business owners personal liability is unlimited. The partner or sole proprietor is personally responsible for all business activities and liable to pay all business debts or obligations regardless of their interest in the business with an exception of the limited partners. To overcome this disadvantage you may adopt a structure that limits the personal liability of the business owners in business obligations. Forming a Limited Liability Partnership, Corporation or a Limited Liability Company will serve the purpose. In these forms of legal business structures, the business owner’s liability is limited to their capital contribution. Many statutory and legal formalities are involved in forming and operating these business structures.
Why incorporate is because corporations are suitable for businesses which need considerable capital infusion and time to grow and prosper. Corporations have a separate legal identity from that of its owners. Business continuity is not affected by the disability or death of a business owner in a corporation. There are two types of corporations, a C Crop and an S Corp. Though the basic structures of the both entities are same, S Corporation advantage is that it has a pass through taxation. The shareholders can report their share of profits in their personal tax returns and pay tax there. The C Corporation profits are subject to corporate taxation and when the profits are distributed as dividends to share holders, they in turn pay taxes on these profits again. To start a corporation, you have to understand the basics of incorporation. Business entities are formed under state rules and regulations. To understand how to form a corporation, you consult the state agency dealing with incorporations in your state.
