This article titled ‘Business Structure and Its Types’ is written by Mayank Shekhar and discusses the business structure and its different types.
The company structure chosen affects everything from day-to-day operations to taxes and personal property risk.
One should choose a company structure that strikes a balance between legal security and benefits.
Introduction: Business structure and its types
The term “business structure” refers to the recognized legal structure of an organization in a particular country.
The legal structure of a company is important in activities such as raising capital, liability for business commitments and the amount of taxes payable to the taxing authorities.
Before deciding on a legal structure, company owners should evaluate their needs and goals and become familiar with the specifics of each business form.
In the United States, the four primary business structures are the sole proprietorship, partnership, limited liability company, and corporation.
diverse business structure
The following sections examine various company structures in detail:
sole proprietorship
A sole proprietorship is the simplest business; It consists of a single person responsible for the day-to-day operations of the company.
Additionally, business income and expenses are included in the owner’s tax return.
Due to the fact that the company does not exist as a separate legal entity from its owner, it is not required to submit a separate income tax return.
Form 1040 must be filed by the employer and must include Schedule C and Schedule SE for self-employment taxes.
Running a company as a sole proprietorship has many advantages.
To begin with, it is very cheap to install and there are few costs associated with a sole proprietorship installation.
In most states, company taxes and operating license fees are the only costs involved in setting up a sole proprietorship.
Additionally, business owners may be eligible for tax deductions for expenses such as health insurance.
Unlike a limited liability corporation, a sole proprietorship is not subject to continuing obligations such as shareholder meetings, voting, or the election of directors.
On the downside, since the company is not legally separate from its owners, the owners will be personally liable for the company’s debts, liabilities and obligations.
Advantages of Sole Proprietorship
Owners can create a sole proprietorship quickly, easily and affordably.
A sole proprietorship is subject to few, if any, continuity requirements.
A sole proprietor is exempt from self-employment tax (although he or she must pay unemployment tax on employees).
Owners have complete freedom to combine company and personal assets.
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A partnership is a type of company organization in which two or more owners participate.
This is the simplest company structure for two or more owners. A partnership is a sole proprietorship.
For example, since a company does not exist as a separate legal entity from its owners, the owner and the organization are treated as a single person.
Profits and losses from the firm are distributed to the partners when taxes are paid, and each partner is required to disclose the information on Form 1065 with their personal tax return.
In addition, partners are subject to self-employment tax, which is calculated based on their share of the enterprise’s revenue.
Form 1065 must be accompanied by Schedule K-1, which details the income or loss.
Many benefits accrue from the partnership company arrangement. Forming a partnership requires minimal documentation and partners are not subject to the same restrictions as limited liability corporations.
In addition, partners enjoy special tax treatment as they have to declare part of the business’s profits or losses in their personal income tax returns.
On the downside, partners are personally liable for the company’s debts and liabilities, and their personal assets can be liquidated to meet corporate commitments.
Additionally, disputes between partners may arise, resulting in slowing down of business activities.
Advantages of partnership
Owners can form partnerships easily and economically.
Partnerships are not required to meet annually and have minimal ongoing formality.
Most small firms benefit from advantageous tax treatment as a partnership.
Partnerships usually don’t have to pay the minimum taxes that LLCs and corporations do.
Disadvantages of partnership
All owners are personally liable for the debts, losses and liabilities of the business (except limited partnerships and limited liability partnerships).
Individual partners are responsible for the actions of their counterparts.
Inadequately structured partnerships and oral partnerships can lead to disagreements between owners.
Corporations
A corporation is a type of company structure that legally separates an organization from its owners.
It is time-consuming and expensive to establish and requires owners to comply with additional tax and regulatory obligations.
Most companies use attorneys to oversee the registration process and verify that the organization complies with applicable state law.
When a company wants to go public through a public offering of common stock, it must first be incorporated as a corporation.
Corporations must pay both federal and state taxes, while shareholders must report dividend distributions on their personal income tax returns.
A C-corporation is a legal entity separate from its owners, while an S-corporation can have up to 100 shareholders and operates much like a partnership.
The ability to raise money is an advantage of the company structure. A company can raise significant amount by selling public stock.
Additionally, the company structure has limited personal liability, which protects the owners from the firm’s debts, liabilities and obligations.
On the downside, a corporation is subject to more regulations than a sole proprietorship or partnership, including meetings, voting, and director elections, and is more expensive to establish than a sole proprietorship or partnership.
Advantages of Corporations
Owners are exempt from personal liability for business debts and liabilities.
Corporations benefit from a strong corpus of legal precedent that serves as a guide for owners and management.
Corporations are the optimal form of organization for future public businesses.
Corporations can raise money more easily by selling securities.
Corporations can easily transfer ownership through the transfer of securities.
Corporations can exist in perpetuity.
Corporations can generate tax benefits in certain situations, but be aware that earnings earned by a C corporation may be subject to “double taxation.”
Disadvantages of corporations
Corporations must hold annual meetings and require owners and directors to follow certain procedures.
Setting up a corporation is more expensive than a partnership or sole proprietorship.
Corporations must pay annual fees and submit periodic reports to the state.
Dignified Liability Partnership
A limited liability company (LLC) is a hybrid business type that combines the advantages of both a partnership and a corporation, meaning it has characteristics of both.
It protects company owners from personal liability and minimizes tax and business liabilities.
Profits and losses are passed on to the owners and each company owner is required to report a portion of the profits/losses on their personal tax forms.
Additionally, unlike an S-corporation, which is limited to 100 stockholders, a limited liability company has no such restrictions.
When a limited liability corporation is formed, the organization must file its articles with the secretary of state of the state in which it intends to do business.
Some states may require the entity to submit an operating agreement.
One advantage of forming a limited liability company over forming a corporation is that there are fewer formalities.
There is less paperwork required and owners benefit from limited liability, which prevents their personal assets from meeting the entity’s obligations.
No restrictions exist on the number of shareholders a limited liability corporation can appoint.
On the downside, forming a limited liability company is expensive, as it needs to be registered in the state where it wants to do business.
In addition, the company may require the services of accountants and attorneys to ensure compliance with applicable tax and regulatory laws.
Advantages of LCC
LLCs are not required to convene annually and have minimal ongoing formalities.
Owners are exempt from personal liability for business debts and liabilities.
LLCs benefit from a partnership-style pass-through tax, which many small companies find beneficial.
Disadvantages of LCC
There is no reliable body of legal precedent to assist LLC owners and managers, but LLC law is becoming more reliable over time.
An LLC is not the right structure for companies that want to eventually go public or raise cash in the financial markets.
Forming an LLC is more expensive than forming a partnership.
LLCs require annual fees and frequent filings with the state.
Some states prohibit the formation of LLCs for certain business ventures.