Should you be a sole trader, partnership, limited company or LLP? What’s the Best Legal Structure for your Business?
You’re prepared and ready to start your new business, but how should you decide on the correct legal structure for your business? The answer to this question should not be taken lightly, as the legal structure you choose can have a significant impact on your ability to grow and survive .
So here team of Filing Bazaar helps in choosing the best legal services within minimum time .
There are many structures which can be considered depending on the activities and needs of your business; however it is unlikely that as a new start, you will need to start as a public limited company (PLC), or offshore company. Other structures such as community interest companies and cooperatives tend to be required in specific circumstances. The best initial approach is to keep it as simple as possible as using more sophisticated structures can come later.
A type of business entity that is owned and run by one individual – there is no legal distinction between the owner and the business. Sole Proprietorships are the most common form of legal structure for small businesses.
a.Taxation: A sole Proprietorship has pass-through taxation. The business itself does not file a tax return. Instead, the income (or loss) passes through and is reported on the owner’s personal tax return through a Schedule C (Form 1040).
b.Liability: The Owner of the sole proprietorship has unlimited personal liability for any liabilities the business incurs. You can mitigate this risk with insurance and sound contracts.
c.Formation: The sole proprietorship is the simplest way of doing business. The costs to create a sole proprietorship are very low and very little formality is required.
An association between two or more people in business seeking a profit. Partnerships can be created with little formality, but because more than one person is involved, a partnership agreement should be created. A partnership agreement stipulates the terms of the partnership by formalizing rules for profit/loss sharing, ownership percentages, dissolution terms, and management rights among many other things.
a.Taxation: A partnership is a tax-reporting entity, not a tax paying entity. A partnership must file an annual information return (Form 1065) with the IRS to report income and losses from operations, but it does not pay federal income tax. Profits and Losses are passed through to the owners based on their profit sharing percentages outlined in the Partnership Agreement. Each partner pays taxes on their share of the profit/loss.
b.Liability: Owners typically have unlimited personal liability. Each partner is jointly liable for the partnerships obligations.
c.Formation: Usually easy to create, but it is important to have an attorney create the partnership agreement. Partnership agreements establish the terms of the partnership and typically cover topics such as:
• Capital Contributions
• Distributions of profits/losses
• Management Responsibilities
• Bookkeeping
• Banking
• Dissolution
Pros of General Partnerships:
• Fairly easy to create and maintain.
• Profits and losses are passed through to the owner’s personal tax returns.
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