One of the first decisions that you will have to make as a business owner is how the company should be structured. This decision will have long-term implications, so you are strongly encouraged to consult with an accountant and attorney to help you select the form of ownership that is right for you.
Organization of a business entity is done for several reasons, the most important being to limit liability and financial expenses to the capital dedicated to the venture. You need to respect the entity, keep proper records and take appropriate actions. This will preserve the "insulation of liability" and make key issues like "who owns what and what rights are there" much easier to determine down the road.
While there are several factors that determine how a business is initially organized, tax factors generally play a primary role. The form in which a business is organized depends on an analysis of the particular facts of the business. However, start-ups often are organized as a "flow-through entity" which is an entity that is subject to a single level of tax. Specific types of flow-through entities include partnerships, limited partnerships, LLCs and S corporations.
These are the entities of choice for most new business owners looking to formally organize. Subject to certain restrictions, start-up losses of such an entity may "flow-through" to its owners in the form of tax deductions. Alternatively, a company may be organized as a regular, or "C" corporation. A significant disadvantage to operating as a C corporation is that its earnings are exposed to "double taxation" which means that the corporation is subject to income tax on its earnings and the owners are taxed when the company distributes the earnings as a dividend. But there is no single "right" answer. It depends on what kind of business you have, who will own it, what sort of deductions it will generate and the accountant you use.
Answer provided by Chuck Roach - Roach Law
Tuesday, November 13, 2007
What type of business should I be?
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