If we are to be completely honest – no one ever likes dealing with all the paperwork and red tape involved with starting a business. There are so many legal catches to keep in mind, that you often have no hope of making sense of it all without professional help.
However, if you choose to neglect this initial stage of company formation, you may be setting yourself up for some hefty penalties down the line. If you want to avoid all the hiccups and legal fines, you should register your business before you start operating – but again, how do you do that exactly, and which structure should you choose?
Think Things Through
If you think that all the legal structures your business could adopt are the same, you are very wrong. This is what will determine what kinds of taxes you need to pay, your own liability, and flexibility regarding ownership change.
When you are setting up your company, you need to look into all the available options first, and then make your choice. You can go for one of four main structures, and we are going to list them here, as well as the pros and cons for each. Before you make your decision, make sure to consult other sources too: one will never be enough to tell you all you need to know about the specifics in your country, or your line of work.
A sole-proprietorship is the simplest and most straightforward option to choose. As you may guess, you will be the sole owner of your business, and you and the business will be viewed as one and the same. This means you will be paying much less taxes, because they will be a part of your own personal tax returns. However, this also means you are personally accountable for bankruptcy or any other legal issues that may arise.
If you ever get sued, your own assets will be the ones on the line. The most definite pro is that you are in charge of every decision made, and you don’t need to answer to anyone. You can register your company online, as a sole-proprietorship, and get things in motion quite fast.
A partnership is quite similar to a sole-proprietorship, in the sense that they have two, or more, partners who are then equally liable to whatever happens to the business. Every partner pays individual taxes based on their share in the business. This can be a great setup for a startup, if you don’t want to fly on your own, and are looking to share the burden and the rewards with someone.
You can also choose to go for a limited partnership, where one of you is the general partner, and all the others are limited partners, held liable only for the amount they have invested in the business, which is a great option for investors. However, you will have to share your ideas and plans with someone else, which may or may not be what you are looking for.
A corporation is a legal entity owned by shareholders. There are two types of corporations, and they differ in the method of taxation. There are C corporations which offer limited liability to shareholders, meaning you are less liable than if you were a sole-proprietor, which is a good thing, and you will pay taxes as if you were one. The downside of S corporations is that they can have no more than one hundred shareholders, and no foreign ownership is allowed.
There are also C corporations, which are not as limiting, but are rather expensive to run. Bear in mind that running a corporation is a complex feat and it demands a lot of effort, so weigh your options carefully before you make your choice.
A Limited Liability Company
Lastly, a limited liability company is a sort of a hybrid between a corporation and a partnership. Like with corporations, limited liability companies are an independent legal entity, which makes you less liable, and yet you are still the owner of the company, as you are with a partnership.
This is a less complex and expensive option than a corporation, and it is easier to set up, much like a partnership, which makes it the best option in many ways. The one downside is that you will have to pay self-employment tax, and this option is also not as appealing to investors.
The choice you make will come down to the particular business you wish to run.
Partnerships and LLCs are more manageable, but if you prefer to have sole control, then a sole-proprietorship might be the way to go. Just make sure you carefully consider all the liabilities and responsibilities. You can change your mind later down the road as well, but it will require more hassle than it is worth. Make sure you make the right choice the first time around, and watch your business prosper.