Published By Janet Gershen-Siegel at April 24th, 2018
Do you know how to choose the right business entity for your company? We show you how to do it – it’s easy!
This is your decision to make. Pay close attention to the tax burden and personal liability as they can affect you, particularly if you have a business with known hazards, such as carpentry or exterminating. You might also want to consider how much control you want to have over your small business. A sole proprietorship means you call all the shots, but it also means you’re responsible for everything. That can be too much to handle. If it is, then consider one of the other common business entities for a small business.
Business entities differ when it comes to how the IRS treats them for tax purposes.
Here are the specifics:
Legal liability varies when it comes to business entities.
It may seem obvious, but an individual owner cannot be a partnership and vice versa. Very large companies tend to be incorporated, due to the first two tips listed above. A corporate structure can save individuals from both tax and legal liabilities – most of the time.
Of course, if there’s only one person, then there’s only one split – e. g. no split at all. But what about when it comes to partnerships? They do not have to be split evenly. However, that is the assumption so, unless the specifics are spelled out in the partnership agreement, it is assumed the split is an even one.
As for corporations, the split is dictated by the percentage of shares owned by the stockholders, and the total number of stocks. A corporation with 100 shares and 100 shareholders isn’t much different from a regular partnership when it comes down to profit distribution. However, corporations tend not to be run that way. Instead, in a corporation, the biggest shareholders either have a seat on the Board of Directors or they control a seat where they have installed someone on the board who will fulfill their wishes. Hence in a corporation with 100 shares of stock, the board might consist of three people who each have 20 shares, with the remaining 40 shares being distributed evenly amongst other shareholders who have smaller percentages of the whole.
Finally, how do you want the business to be controlled? Will it be one person calling the shots? Will partners informally divide the work amongst themselves? Or will a Board of Directors take a more formal approach, with annual meetings which the other shareholders are invited to?
Business entities can be changed. None of these decisions is set in concrete, particularly as companies grow and shrink all the time. The Internal Revenue Service is well aware that circumstances can force all sorts of changes. This can be anything from the death of a partner to a lawsuit against a member of a corporation’s Board of Directors. If you need to change your business entity, you’d hardly be the first business owner to do so. It’s never too late to switch to the correct business entity. Share this and tell your friends what you think of how to live your best financial life.