Choosing a Legal Structure for Your Biz

What to consider when trying to set up your upstart

losses pass through the business owners, who report their share of the profit on their personal income tax return. Corporation owners pay taxes on profits they receive in the form of salaries, bonuses, and dividends, according to NOLO.com, a website that offers do-it-yourself legal advice. The corporation itself pays taxes–at special corporate tax rates–on any profits that are left in the company from year to year (called “retained earnings”). For more on tax implications, visit IRS.gov.

Ease and cost: Sole proprietorships and partnerships tend to be easier and less costly to form since you don’t have to file any special forms or pay any fees, according to NOLO.com. Conversely, there is a $40 to $800 fee (depending on the state) to register an L.L.C. or a corporation. Remember, with an L.L.C. or corporation, you must also file paperwork with the state, elect officers to run the company, and maintain thorough records.

Ownership and liability: If you create a sole proprietorship, all the assets of the business are owned by the owner, according to the Small Business Administration. In a sole proprietorship, you may hire employees but you also assume legal responsibility for the decisions your employees make. Because a business and its owner are one and the same with a sole proprietorship, owners assume “unlimited personal responsibility” for the business’ assets, according to the SBA, the business’ creditors can go against both the business’ assets and your personal assets, including your bank account, car, or house. On the other hand, the assets of businesses owners in a corporation or L.L.C. are protected. While a sole proprietorship and partnership are easier to set up, when it comes to ownership and liability, the onus is on you.

Check out NOLO.com for more on the advantages and disadvantages of each legal structure. Also visit the SBA.gov: http://business.sba.gov/register/incorporation/ and http://www.sba.gov/smallbusinessplanner/start/chooseastructure/index.html.

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