Every form of business has potential risks and liabilities. Choosing the apt legal form for your business depend on the degree of the potential risks. If you operate a business that has minimal risk potential, you may assume the forms of sole proprietorship or a partnership if two or persons are involved in the business. Proprietorships and Partnerships are easy to form and operate. Hardly any legal formalities are required to be complied with. Whatever business permits or licenses needed to operate a business has to be taken care of. The issue with these legal forms of business is that they do not protect the business owner’s personal assets from business debts. If the business defaults payments to creditors or lenders, the business owner will have to settle by using personal resources. This is the reason why you should not remain a sole proprietorship for long.
Business owner’s personal liability to business debts can be limited by forming a Corporation or a Limited Liability Company. State laws have to be complied with for forming both forms of business. There are a few formalities required for the formation. Limited Liability Company can be formed by filing an Articles of Organization with the state department managing business registrations and paying a fee. Limited Liability Company offers personal limited liability protection and flexibility in managing the business operations as in partnership or sole proprietorship. LLC can be constituted with a single member or multiple members. Another advantage with LLC is that it can elect to be taxed as any of the other IRS tax classification that is more beneficial in tax planning.
Forming Corporations entail extensive procedures. As any business entity, Corporations are also formed under state statutes. Procedures and formalities in incorporating your business may vary in each state. Corporations offer the limited liability protection to its share holders. This is the most adopted form of business due to its perpetuity and strict regulations controlling its operations. Lay investors prefer corporations above other forms because buying and selling shares in a corporation is easy. If you have plans for your business to expand beyond the status of a small business, corporations are your best bet. Why incorporate is because of these qualities of corporations. It is easy to attract capital and business continuity is not dependent on its business owners. Corporations can be of two types. S Corporations and C Corporations. Though the legal structures of both are same, there are some restrictions in S Corp business ownership. The taxation differs, S Corps have a pass-through taxation whereas the C Corp is subject to corporate taxation.
