Which Business Structure Suits you Best

Being your own boss sounds like a good idea, but before you take out a loan that you’re not quite sure you could pay for, you have to know what kind of legal structure you are looking into, as this will impact a lot of aspects when running a business. This includes the amount of paperwork to do, the taxes you need to pay, and even the personal liability you’ll face in building your business.

Choosing A Business Structure

There are several forms of business proprietorship structures you need to look into. Research & Understand which one will work best with the business you have in mind, here are some things you should ask yourself:

• At any point, do you think you will get sued? Most types of proprietorship will offer a level of legal protection that arises from your business activities.
• Are you thinking that you will experience a loss in the first few years? Some structures allow the losses of the company to offset the taxes on your personal income. There are companies that do not allow this, thus any profits or losses stay within the company.
• Are you planning on investing your profits back to the business? Some types of companies are taxed only at corporate level, while others tax owners as ordinary income.
• Are there any foreign-based owners? Some structures do not allow foreign-based owners in a company.
• Are you looking into crowdfunding or other similar tactics? There are professional investors which limit their investment to preferred stocks.
• Are you thinking of issuing equity awards to employees? Some structures will be complicated by employees owning equity shares of a company.
• Are you going to wait five years before selling or going public? Think about the flexibility of the company’s structure of sale for assets and stock purchases.
• Are you thinking of committing to a social mission? Your commitment to corporate social responsibility can give you access to investors, but will also require you money for maintenance of certifications for your mission.

Sole Proprietorship

The simplest business structure remains to be sole proprietorship, which means you are the single owner of your business. You will only need to start selling your product or service according to your terms because it is essentially not a legal entity as much as a person who owns and is responsible for the business.

If you intend to work as an individual owner who also manages or operates the company, this structure may serve best for you. A sole proprietorship operates under the name of its owner, or under a fictional name. However, despite being so, the name remains to be a trade name and will not serve as a legal entity that is separate from the owner.

The simplicity of being a sole proprietor extends to the documents needed to be filed. A sole proprietor will only need to register his or her name and the name of the business, as well as secure local licenses as mandated by the government.

Sole proprietorship have fewer documentation requirements compared to other business entities, however, key documentation requirements still need to be submitted.

The Documents Needed for Running a Sole Proprietorship Include the Following:

• Business License – This is mandatory for states, counties, or local municipalities. In most states in the US, the business license can be obtained through the municipality where the proprietor is doing the business. This is, however, valid only for a limited time and must be renewed on a regular basis.
• Trade Permit or Professional License – proprietors who are engaged in regulated trades must also have specialized permits or licenses before operations begin. For instance, a sole proprietor must have his accounting license before he can act as a certified public accountant, and will, therefore continue to comply with the regulations regarding his trade or profession.
• Sale and Use Tax Permits – a sole proprietor should register with the state taxing authority in order to obtain permits or certificates as necessary to collect the sales tax. This document is then displayed prominently at the sole proprietor’s place of business.
• Business Name Registration – businesses that operate under a different name other than that of the sole proprietor are required to register the business name with a government office, normally at a local level such as the county clerk’s office or at a courthouse.

Advantages

• Easy Setup – There is little paperwork to be done, and a sole proprietorship business does not involve a formal creation of a company or organization. Most of all, it is the least expensive to set up.
• Flexible Management – because a sole proprietorship is very small and can even be a one-man-operation if necessary, the sole proprietor ends up having complete power over decision making, incurring costs, and end up reaping the benefits on his own.
• Less Regulations – unlike most businesses, a sole proprietorship is subject only to a few regulations, without being governed by specific rules, regulations, or mandatory compliance regarding the structure of the company, as most other kinds of businesses are akin to upholding.
• Tax Advantages – sole proprietorship also tend to have simpler tax procedures because it is considered the same entity as its proprietor. Therefore, it is not taxable on its own, although the owner is still subject to paying taxes. However, only one tax return is needed to be filed, and there is no need to attach a balance sheet of all monetary transactions of the business as supporting document for tax returns.
• Minimum Record-Keeping – sole proprietorship have significantly less account books than partnerships and corporations, and thus, record keeping is more straightforward.
• Easy Dissolution – there is no need to undergo a lengthy process to end a sole proprietorship because there is little formal registration that binds it. Simply pay off all debts and obligations related to the business, close all accounts, and notify the tax authorities about the dissolution for tax purposes.

Disadvantages

• Sole Liability – a sole proprietor will have to shoulder liabilities and losses because the debts and obligations of the business are also his own. In the event that the business is affected by major losses, creditors may be able to go after the proprietor’s personal assets, including cars and houses, as applicable.
• Uncertain Length of Business Life – the continuity of the business rarely extends past the capability of the sole proprietor to operate. Usually, the death or impairment of the owner will also mean cessation of business operations.
• Financing Difficulties – financing usually means using the sole proprietor’s own money as capital, or obtain funds through loans. However, banks are wary about granting them to sole proprietors because they prefer more stable businesses, making sole proprietorship less attractive to them.
• Limited View in Management – being in full control of a business will make a person more subjective in terms of the decision-making process, so decision-making can be a heavy burden at times.
• Less Professional in Appearance – the less professional air of a sole proprietorship may be a problem, depending on the market you want to enter. Some people or companies view sole proprietorship as less professional due to the lack of rigid process in its creation, making it less “legitimate” in the eyes of the public.

Partnerships

Businesses that are owned and operated by several individuals may want to take a look at a partnership structure. There are two kinds of partnerships: general and limited. General partnerships indicate that the partners manage the company and assume their responsibility for the debts and other obligations. Limited partnerships, on the other hand, have general and limited partners, or partner’s that serve merely as investors who have no control over the company.

Personal liability remains to be a major concern in general partnerships, because like sole proprietors, general partners are personally liable for their company’s obligations and debts. Before entering into a partnership, however, it is necessary to have a lawyer prepare formal agreements outlining each partner’s role and level of authority and their financial contribution, a procedure for dispute resolve, and even a procedure for ending or resigning from the partnership.

Partnerships have More Documentation Compared to Sole Proprietorship, Among Which are as Follows:

• Partnership Agreement – Confirms the partners who intend to operate the business, and indicate the respective rights and obligations of the partners. A comprehensive agreement will help minimize the risk of disagreements between partners due to the provisions recorded in the document.
• Registered Business Name or Trade Name Application – When partners wish to conduct business with a fictitious name, they will need to register the name with the county or city where the business operates. This application contains the proposed name of the partnership, location of the business, and a description of business activities.
• Form SS-4 – Used by the company to get an employer identification number, the Internal Revenue Service will assign an EIN to a partnership for tax filing and reporting purposes.
• Bank Account – A bank account in the name of the business will help the partnership keep better track of incomes and expenses, thus help them keep a more accurate financial records.
• Other Operation Licenses – Should there be any licenses or permits necessary to carry out the business such as sanitary permits for restaurants, partnerships need to file them at the appropriate government office.

Advantages

• Easy to Establish – Much like sole proprietorship, a partnership is easy to establish while keeping the startup costs low.
• More Capital – With more people partnering to create the business, more money can be put up as capital.
• Greater Borrowing Capacity – Getting loans will be easier to help finance the business, especially when you are planning on growing further. However, it is important to keep in mind the credit scores of potential partners to keep this advantage.
• New Perspectives – With a few partners to give you perspective in details that you may miss, it is easier to gain a different, or even improved outlook regarding the way each partner deals with the business.
• Tax Benefits – General partnerships don’t have to pay for income taxes as they are indicated to “pass through” profits and losses to its partners. Therefore, each partner is expected to include his share of the partnership’s income on his own tax return.

Disadvantages

• Sharing Liabilities – Partnerships will also share company losses and each member of the partnership will be responsible for any debts even if incurred by a single partner. This could place a burden on personal finances and assets.
• No Full Control – You will not have total control of your business as decisions should be made jointly with your partner or partners, which is why you have to assess your ability to compromise before going into one.
• Future Complications in Selling – there could be a problem with selling in case one of the partners wish to do so in the future. However, this could be dealt with by including an exit strategy in the partnership agreement.
• Lack of Stability – a change in one partner’s situation may cause instability in the business, which is why each partner should be able to cope with the unpredictable nature of business.
• Risk of Friction and Disagreements – conflicts that can arise in partnerships due to differences of opinion or the unequal effort with one partner putting on less weight than others.

Limited Partnerships

Limited partnerships are similar to general partnerships, but with some significant differences. For instance, the management of a limited partnership lies on the general partners, who are also the ones liable for the company’s debts and obligations. Limited partners have a limited liability – only up to the total amount that was invested in the company. Limited partners are also referred to as “silent partners,” therefore they make investments in the company, but have no control over their day to day operations.

The documents required to run limited partnerships also varies slightly from sole proprietors and general partnership companies.

Among the Documents Required for Limited Partnerships are the Following:

• Partnership Agreement – like a general partnership, limited partnership companies are also required to create partnership agreements that outline the structure of the business, and assigns general or limited partner status to each member. This document is legally binding and is created to protect the interests of all partners.
• Limited Partnership Registration – limited partnerships are required to register with the state or federal government as mandated. The certificate format is varied, however, as it requires a disclosure of the name and physical address of the business, as well as the names of the partners.
• Permits – Depending on the nature of your business, you are likely to need additional permits or registrations to operate your business. Most additional registrations are required by the state, including reporting state payroll taxes, sales taxes, and even industry-specific licenses.

Advantages

• Asset Protection – this business structure protects a limited partner by giving liability protection up to the amount invested.
• Pass-Through Tax – similar to a general partnership, limited partnership income is not taxed as a separate entity and is instead taxed per partner, making them each responsible for their personal tax returns.
• No Complications – limited partners can be replaced or could leave the company without dissolving the limited partnership, making turnovers easier.
• Less Management Problems – general managers deal with the responsibilities in day to day operations, and limited partners need not be consulted for business decisions because their responsibilities lie mostly on the investments.
• Less Documentation – similar to a general partnership, limited partnership also requires little paperwork compared to creating a corporation, however, it is still important to file a partnership agreement for future reference.
• More Investment Opportunities – limited partnerships can offer investors the benefit of gaining from the profits of the business without having them be involved in the decision-making process, making it a good investment opportunity for those who are not too keen on the managing part of a business.

Disadvantages

• Risks for General Partners – the general partners of the limited partnership will carry the burden of the debts and obligations. Both will be responsible in case the company gets sued or enters into bankruptcy.
• Challenges in Compliance – because of the presence of investors (the limited partners), limited partnerships will still have to hold annual meetings to keep each partner up to date. It’s important that a detailed partnership agreement is created and continually updated as necessary.
• Personal Liabilities – if a limited partner, for any reason becomes active in business operations, he or she shall have a general partner level of personal liability as well.

Limited Liability Partnership(LLP)

Limited Partnership and Limited Liability Partnership are two very similar business structures. However, they are different in terms of participation of the partners involved in management. In an LLP, all partners enjoy limited liabilities and are allowed to be involved in management. Most professional service businesses like law and accounting firms often prefer LLPs because the partners do not become liable for negligence or malpractice claims made against another partner.

While an LLP provides liability protection to its partners, it is also important to note that liability protection can vary at different states, which is why those looking to create LLPs are encouraged to check with the local Secretary of State office to determine how much liability protection the proposed LLP can provide.

Creating an LLP is not a complex process as long as all the documents and requirements are submitted properly.

Among the Documents Required to Create Limited Liability Partnerships are as Follows:

• Limited Liability Partnership Agreement – this document defines each partner’s role and responsibilities in the company, and should detail with it the partners’ assets as well as limitations to their liability. Other details included are the capital contributions of each partner, distribution of profits and losses, buyout agreements, or considerations in expulsion or addition of partners.
• Certificate of Limited Liability Partnership – this certification is a mandatory document that states in a generalized form the Limited Liability Partnership. Applying for this certificate will also require your partnership to list your business name and physical address, the names and contact information of all the partners, and even information on your agent.
• Registration for Employer Identification Number – with an application form readily available online, this nine-digit number issued by the IRS is used to classify a business for tax purposes, and is required for the partnership to be able to open business banking accounts, to hire employees, or to make business transactions.
• Required Licenses and Permits – Federal and state authorities require permits and licenses for businesses to operate. Check with your local government regarding the specific permits or licenses that you may need to obtain for your partnership.
• Required Insurance – some states require LLPs to purchase specific insurance plans such as workers’ compensation insurance or malpractice liability insurance.

Advantages

• Limited Liability – similar to an LP, limited partners have limited liabilities, so they can contribute for the capital of the business without having to risk their personal assets. It has to be noted however that in an LLP, limited liability is only available for partners who did not participate on the management decisions that resulted to the partnership’s problem.
• No Double Taxation – similar to the business structures discussed earlier, partners are taxed only based on personal income tax returns for their share of ownership.
• Flexibility in the Business – the operation and distribution of profits is determined by the partners via the partnership agreement, therefore more flexibility is allowed in terms of managing the business.
• Corporate Ownership – LLPs can actually appoint companies as members of the partnership
• Designate and Non-Designated Membership – LLPs can be operated with different levels of membership, thereby some limited partners can make management decisions as agreed upon.

Disadvantages

• Availability – there is a very limited number of professions that are allowed to create an LLP, such as lawyers, physicians, or accountants. This limits the kind of business you may be able to get into.
• Liability – a partner in an LLP is held personally liable for his or her own negligence, and can therefore be personally sued, and/or will be responsible for the obligations owed to the business, including the negligence of an employee working directly under a partner’s direct supervision.

Limited Liability Company(LLC)

The Limited Liability Company is considered a hybrid between a partnership and a corporation. It has since been a popular legal alternative for business owners due to the benefits of limited liability and pass-through taxation. Particularly, LLC members cannot be held liable for the debts or liabilities of the company. Still, the LLC’s legal structure is quite loose, thus allowing companies to take advantage of its many benefits, particularly, small business owners. LLCs are considered to be easier to set up and maintain than corporations, however, they remain uninterpreted by court cases because they are still relatively new compared to other business structures.

The following documents are necessary in creating a limited liability company:

• Articles of Organization – outlines basic information including business name, purpose, principal place of business, registered agents, management structure, business duration.
• Operating Agreement – defines the key financial and functional decisions for your business, including distribution of profits and losses, voting rights, or procedure in case of dissolution.
• Notice of Intent to form LLC – required only in a few states to make the LLC official. Licenses and Permits – as defined by the local and federal government.

Advantages

• Limited Liability – similar to corporations, LLCs provide their members with protection from personal responsibility in terms of the company’s debt, ensuring that members are only liable to the extent of their investment in the company. Thus, if a lawsuit bankrupts the business, it cannot touch the personal assets of the members of the LLC, making it a great advantage for any business.
• No Double Taxation – LLCs enjoy exemption from double taxation through pass-through taxes. Therefore, company members report their share of the profits on their personal federal tax returns, and the company does not pay for a federal tax as in the case of most corporations.
• Income Distribution Flexibility – LLC members can discuss among themselves how to divide their income, so long as the rules set follow the IRS rules regarding partnership income distribution. This makes it easier for them to allocate the profits and losses for their tax purposes.
• Simplicity – compared to corporations, LLCs are actually very easy to set up as they have the partnership structure that means they don’t require board of directors, officers, or shareholders meetings, as they don’t require such formalities in its operation structure.
• No Ownership Restrictions – unlike most business structures, LLCs allow foreign nationals or other companies from owning stock in the business. There is also no limit on the number of members that it may have, making it particularly attractive to investors.
• Member Involvement – unlike partnerships where silent partners cannot be directly involved in the running of the business, LLCs allow their partners to be part of the company’s management team while still enjoying their limited liability.

Disadvantages

• Relatively new Structure – the newness of the LLC means that there are few statutes that governs its establishment, therefore the courts are still free to interpret laws. Therefore, it is important for an LLC to get legal and tax advice as well as keep up on the developments of this business structure.
• Complicated Inter-state Business – because the laws of LLCs vary widely from state to state, it can get complicated regarding the conduct of businesses. There are also no uniform laws governing this structure, therefore companies that want to do business in more than one state will have to obtain a greater knowledge of all state laws as required.
• No Lasting Existence – many states require an operating limit for LLCs, with most setting it at 30 years. In the absence of a clause regarding the continuance of an LLC in the event of a death or withdrawal of a member, the LLC will cease to exist.

Corporations

Corporations are legal entities that are separate from its owners. This business structure enjoys rights and responsibilities as individual persons, and can, therefore, enter into contracts, apply for loans and borrow money, can be sued and be sued, own assets, pay taxes, and hire employees. Corporations operate around the globe with all kinds of businesses, and in fact, are established in well-known brands such as Microsoft Corporation, The Coca Cola Company, and Toyota Motors Corporation.

All kinds of Corporations, Including S Corp, B Corp, and C Corp are Required to Comply with the Following Documents in Order to Create a Corporation:

• Articles of Incorporation – this certificate is considered to be the primary document of the corporation filed with the state. Once stocks are issued, the certificate of information can only be amended with the consent of stockholders or partners. Depending on the state where you are putting your business in, there can also be additional provisions to include, such as indemnification of directors and officers.
• By-Laws – this document sets forth the rules of the corporation, including the procedures for meetings of stockholders and directors, the list of officers, and the committees of the corporation, and issuance of stock certificates.
• Registration for Employer Identification Number – this nine-digit number issued by the IRS is used to classify a business for tax purposes.
• Minutes of Organizational Meeting – the organizational meeting includes the approval and ratification of the Articles of Incorporation as well as the bylaws, and this should be established in the minutes, thus showing consent as signed by all the directors.
• Stock Certificates – serves as evidence of stock ownership. While not required in most states, it is considered good practice to issue such on a practical standpoint.
• Applicable State and Local Permits – depending on the type of business you want to run, you will need licenses and permits as required in your state.

Advantages

• Limitation of Liabilities – individuals have a limited liability over the debts of the business.
• Attractive to Investors – ability for corporations to issue stock, making them attractive to investors.
• Stock and Stock Options – the possibility of owning stock attracts top talent and employees.

Disadvantages

• Tax Liability – profits are subject to double taxation, so corporations are taxed on its earnings and shareholders who earn profits as dividends are also taxed.
• Complicated Operation – harder to maintain than other entities, corporations are also expected to publish annual reports and data to allow creditors to assess their credit.
• Corporate Formalities – the government requires corporations to follow formalities to ensure operations. This includes shareholder meetings, board of director meetings, and even records of corporate activities.

S Corporations

S Corporations issue stock and have owners as shareholders of the company. It has features similar to sole proprietorship in which each shareholder is exempt from double taxation and are therefore subject only to their own tax rates.

However, there are some requirements that S Corps have to meet, some of which are the following:

• Have only one class of stock, which means you cannot have different stock types that are prone to getting different treatments, such as preferred and common stock, or voting and nonvoting shares.
• Have less than 100 shareholders, each of whom will have to consent to an S Corporation election.
• Be a corporation – financial institutions, sales corporations, and insurance companies cannot be S Corps.
• Nonresident aliens, other corporations, and partnerships cannot become S Corp shareholders.

Advantages

• Attractive to Investors and Employees – due to the stock that the S Corp can own, they become attractive to investors.
• Limited Liability – stockholders cannot be held responsible for the liabilities accrued by the corporation.
• Pass-Through Taxation – shareholders avoid double taxation, unlike in the case of other types of corporations.
• Flexibility – transfer of ownership is simpler, and the S Corp can become a C Corp in the future if desired.

Disadvantages

• Lengthy Formation Process – a lot of legal involvement is necessary in the formation of an S Corp.
• Increased Tax Obligations – wrong filing of tax may catch the IRS’s attention and you can lose the S Corp status
• Stock Restrictions – unlike other corporations that can own several stocks, S Corps can only own one type.

B Corporations

B corporations are considered to be leaders of a global movement that uses its business for good. It has a higher standards of accountability and transparency compared to other business structures, and is deemed to create opportunities that will help solve bigger problems in the society.

Among the standards that B Corps have to adhere to include publishing public reports of the corporation’s overall social and environmental performance, as assessed by a third party standard. Their performance must also be evaluated by showing that they achieve the required minimum verified score on B impact assessment, and a re certification is required in order to ensure that the B Corp is evolving along with the set standards.

In addition to the documents necessary in creating corporations, B Corps are required to submit additional requirements due to the higher standards set.

Additional Documents Required to be Submitted by B Corps Include the Following:

• B Impact Assessment – this will be the first step in becoming a certified B Corp, and it assesses the overall impact of the B Corp to its stakeholders. This assessment varies depending on the size of the company, the sector, and the location of its primary operation.
• Legal Certification – this gives the B Corp a legal protection in considering the interests of stakeholders and shareholders when making decisions, and even limit expanded rights to shareholders.

Advantages

• Effective Marketing Tool – the B status of a company gives it instant credibility in supporting causes. The status of a B Corp ensures consumers that you take your stated missions seriously, with real evidence to back up your claims.
• Built-In Requirements – with the built-in rules that comes with creating a B Corp, there is no need for the messy internal debate between shareholders regarding the best actions to follow in the operations. With the standards that must be met and audits that ensure rules are being followed, there is no internal messes to deal with.
• Involvement is Easier – those who support the organization will have their contributions be tax deductible. Due to the nature of B corps, it is allowed to charge annual fees, raise funds, or hold non-profit activities that could easily attract investors.
• Sharing Resources – B corps are allowed to network with similar business owners who have similar goals, thus allowing them to share resources in a mutually beneficial way that may not always be available to other corporations.

Disadvantages

• As Good as you Make it – if a B Corp fails an audit, or if it fails to prove that it is staying true to its mission, then it could lose its certification.
• Accountability Can be a Headache – allowing a third party to audit your Corp could put you in a risk of opening it to criticism, and could even strip the B Corp status away.
• B Corp Structure is not Available Everywhere – due to the relative newness of the B Corp, it isn’t always available in every state, so for states that are yet to allow a B Corp status, it is recommended that you start with an S Corp and transition later instead.
• No Corporate Tax Benefits – there is no tax-exempt status associated with a B Corp, which means that the organization will be responsible for paying the taxes as any other organization.

C Corporations

A C Corporation is another type of entity that is taxed separately from its owners, as stated under subchapter C of the Internal Revenue Code. Like any other corporation, it is owned by shareholders. However, it is required to report to the State Attorney General regarding regarding its finances. Because it is treated is an independent entity, a C corporation will not cease to exist upon death or change of shareholders.

Advantages

• Less Audits – the C Corp is at a lower risk of being audited, compared to the B Corp. Limited liability – owners and shareholders have a limited liability regarding the debts that the business will get into.
• Cost Benefits – C Corps can deduct costs of benefits as business expenses, and can, therefore write off employee health plans as business expenses, ensuring that they are tax free.
• Overall Tax Savings – C corps can split business profits among owners and the corporation, resulting in overall tax savings.
• Unlimited Shareholders – the corporation can sell shares to a large numbers of investors, which can allow more funds to be raised in projects.

Disadvantages

• Double Taxation – the corporation itself is taxed per its income, however, anytime it issues a dividend, shareholders are again taxed based on the amount that they receive.
• Complicated Formalities – the sheer amount of proceedings required to create corporation can be overwhelming, especially to those who are new at starting a business.
• Expensive Maintenance – C Corps can be quite expensive to maintain considering the incorporation fees and other associated costs for compliance of corporate formalities.

Non Profit Corporations

Nonprofit corporations are special types of structures organized specifically to meet specific tax-exempt purposes. However, qualifying for such status requires the corporation to be formed to benefit the public, a specific group of individuals, or the membership of the nonprofit. Some examples of nonprofit corporations include religious and charitable organizations, credit unions, or even membership clubs such as country clubs.

Advantages

• Longevity – unlike most other organization, nonprofit corporations can exist after their founders leave or die, as long as the purpose of the corporation stays relevant and still continue on generating revenue.
• Limited Liability – employees of nonprofits cannot be held liable for the debts that the organization incurs.
• Tax-Exempt Status – nonprofits do not pay any taxes, so earnings can be put back into the organization
• Public and Private Incentives – donations, whether made by individuals or corporations, are tax deductible, and thus encourage people to contribute to the organization.
• Grants Eligibility – government grants can be used as additional source of funding for nonprofit organizations.

Disadvantages

• Startup Costs – starting a nonprofit can be costly, from the application alone to the preparation and work allocated to devote to the organization.
• Maintenance of Status – nonprofits are required to submit filings to comply with the laws of incorporation. Additionally, there are also activities that could jeopardize nonprofit status.
• Prohibitive Activities – nonprofits cannot engage or attempt to influence legislation, as this could be a risk to their tax-exempt status.
• Subject to Public Scrutiny – anyone can request copies of filings of nonprofits, and review their expenditures and incomes as they see fit.

Trust

Trust, like corporations, are allowed to transact business, borrow and lend money, and can even operate as a legal person. However, the basic concept of a trust differs from corporations in a sense that they are a way for individuals to own property for personal and familial purposes. Simply put, trusts are business structures wherein a trustee carries out the business on behalf of the members. Trusts and corporations, however, overlap to the extent by which a nonprofit organization can be carried on as a trust or as a nonprofit corporation.

Advantages

• Inexpensive – Trusts have relatively low capital costs compared to corporations
• Management continuity – a revocable trust ensures properties remain available for use to your own benefit, even when you become incapable of managing your affairs.
• Maintaining control – revocable trusts gives you the full use of assets while alive, then passing the authority onto a successor trustee. The successor trustee then distributes the assets to beneficiaries, as noted.

Disadvantages

• Property re-registration – property must be registered in the name of the trust, which could be a burden.
• Trust deed – funds may be withdrawn from the trust to be paid to beneficiaries.

Joint Ventures

A Joint Venture is an agreement wherein two or more parties pool their resources together for the purpose of accomplishing their specific tasks, whether it’s a new project or a business activity. In Joint Ventures, participants are responsible for profits, losses, and most especially, the costs that are included in it.

Although they are designated as partnerships, joint ventures can take on any legal business structure, from corporations, partnerships, or limited liability companies. However, they are typically created purposefully for production or research.

There are additional requirements needed in creating a joint venture, which are essential in documenting the constitutional aspects and how it operates. Other documents necessary in creating joint ventures are as follows:

Joint Venture Agreement and Articles of Association – these documents are necessary for documenting the constitutional aspects of the JV, and how it operates. Elements of the joint venture agreement include the purpose of the venture as well as the management planned for it, such as the balance of responsibilities and power, finances and funding, asset ownership and contributions, third party transfers, dispute procedures, and termination procedures as well as practicalities of termination and finances.

Some Documents Needed to Create Joint Ventures Include the Following:

• Various Agreements – this may include management agreements, asset transfer agreements, distribution and marketing agreements, or supply of goods and services agreements as necessary.
• Loan Note Instruments – this specifies the interest payable of the loans, and when the loans must be repaid. Loan notes are simple but important, especially in business and finance.

Advantages

• Increased Productivity and Greater Profits – with access to new markets and distribution networks, joint ventures have increased capacity, thanks to sharing of risks and costs with partners, as well as gaining access to greater resources.
• Enable Company Growth – the customer database of your venture partner can also be used to market your own product, while offering your partner’s services and products to your existing customers, as well.
• Flexibility – with a limited life span, and covering part only of what you do, joint ventures limit the commitment for the parties in the joint venture.

Disadvantages

• Complex Relationships – joint ventures take time and effort to build especially if the business relationship requires resources or abilities that don’t match your own.
• Time and Effort to Build – there are a lot of problems that are likely to arise with JV’s in terms of time and effort, especially if the objectives of the venture is not clearly communicated to everyone involved, or if the partners have different objectives.
• Poor Integration and Cooperation – with different cultures and management styles, there may be poor integration if the joint venture is not planned properly, especially if the venturing partners don’t provide leadership that is sufficient for the support of their early stages.

Quick Comparisons

Filing Requirements

• Sole Proprietor – No
• General Partnership –  No
• LP – Yes
• LLP – Yes
• LLC – Yes
• Corporation – Yes

Difficulty of Setting Up

• Sole Proprietor – Low
• General Partnership –  Low
• LP – Low
• LLP -Medium
• LLC -Medium
• Corporation – High

Liability

• Sole Proprietor – Unlimited Liability
• General Partnership –  Partners have Unlimited Liability
• LP – Members are not Typically Liable
• LLP – At Least one General Partner has Unlimited Liability
• LLC – Members are not Liable
• Corporation – Shareholders are not Responsible for the Debts of the Corporation

Legal Requirements

• Sole Proprietor – Few
• General Partnership –  Few
• LP – Some Formal Requirements, But Fewer Than Corporations
• LLP – Some Formal Requirements, But Fewer Than Corporations
• LLC – Some Formal Requirements, But Fewer Than Corporations
• Corporation – Includes Board of Directors, Annual Meetings, and Annual Reporting

Business Management

• Sole Proprietor – Owner or Sole Proprietor has Full Control of Management and Operations
• General Partnership –  Each Partner has Equal Voice in Control Unless Otherwise Stated
• LP – Limited Partners are Excluded from Decision-Making Unless They are also Member of the Board of Director
• LLP – All Partners can Directly Manage the Business
• LLC – An Agreement Outlined by the Members Indicates Management
• Corporation – Managed by Directors as Elected by Shareholders.

Determining Federal Taxes

• Sole Proprietor – Non-Taxable Entity; All Taxes Paid by Sole Proprietor
• General Partnership –  Non-Taxable Entity; Each Partner Pays Taxes Depending on his or her Share of Income, and Taxes can be Deducted on Losses Against Other Sources of Income
• LP -Taxes Filed as Separate Entity, but must Meet Criteria to Avoid Being Taxed Similar to Corporations.
• LLP – Taxes Filed as Separate Entity, but must Meet Criteria to Avoid Being Taxed Similar to Corporations.
• LLC – No Tax at Entity Level, Although Income and Losses are Passed Through to Each Partner.
• Corporation – Double Taxation; Corporations are Taxed at Entity Level, and Shareholder Dividends are Taxed at Individual Level.

Threat of Assets

• Sole Proprietor – Yes, Sole Proprietors have Unlimited Liability
• General Partnership –  Yes, Partners have Unlimited Liability
• LP – No, Members are not Typically Liable
• LLP – At Least One General Partner has Unlimited Liability
• LLC – No, Members are not Liable
• Corporation – No, Shareholders are not Responsible for the Debts of the Corporation

Receiving Profits

• Sole Proprietor – Keeps all the Profits
• General Partnership –  Splits Profits Evenly Unless Otherwise Stated.
• LP – Splits Profits as Stated by Partnership Agreement
• LLP -Splits Profits as Stated by Partnership Agreement
• LLC -Splits Profits as Stated by Partnership Agreement
• Corporation -Splits Profits as Stated by Partnership Agreement

Changing Business Structures

Restructuring your business usually means reorganizing it to become more profitable, or to adapt to the changing needs of the business. Restructuring may include a change in ownership, adding partners, or even changing the legal and operational aspects of a business. However, as your business changes and grows, you will have to learn how to manage the changes accordingly – especially in terms of growth which can affect your business structure and tax requirements.

Steps in Changing Business Structures

In changing your business structures, you have to weigh the pros and cons of your business, so you should also understand all the options made available to you.

1. Assess your Options – there is a certain amount of paperwork required to be filed, so you have to understand each kind of structure before you make the decision to change your current structure.
2. Consider the Legalities – reassess the pros and cons of your current business structure, and consider the importance of five major characteristics of businesses, including the liability, tax requirements, fees and forms needed in the restructure, investment needs, and operational continuity and management.
3. Expect Changes in Business Operations – expect to file more paperwork, including articles of incorporation and bylaws, as well as an increase of fees and expenses.
4. File, Register, and Re-apply as Necessary – you may need to file a DBA with your local government agency, re-register with the IRS in case you need to apply for a new EIN, register with local and state agencies, re-apply for licenses as applicable, and notify your bank and insurance company of the change.

Checklist for Changing Business Structure:

Consider the following checklist to keep track of how you are changing your business structure, whether from sole trader to becoming a company, or vice versa:

• Tax Considerations – businesses tend to change their legal type due to tax reasons, with some being pass-through entities that pays taxes through the personal tax returns of its owners or stockholders, while other types of businesses pay twice in taxes.
• Liabilities – similar with tax considerations, there is a difference in liabilities when it comes to changing business structures. For instance, sole proprietors and simple partnerships are entirely liable for the problems that the business may ensue, while limited liability companies cannot be liable for the company’s debts or credits.
• Responsibilities and Management – with a change in business structure comes a change in management, which not many may be too happy about, so make sure you know how to handle changes in responsibilities with the change in the organizational dynamic
• Asset Protection – some business structures protect a person’s personal assets in case of problems with the company, however, some, such as sole proprietorship, can be held entirely liable for the costs incurred by the business, so creditors can go after an the owner’s personal assets.
• Ongoing Costs – going from a simple to a complex business structure can be expensive, especially for more complex forms where more licenses, requirements, or documentations are required to start the company.

It is important to take note that getting your legal team together, including your lawyer, accountants, and event financial advisers can help you review the components in changing your business structure, and will help you determine whether or not such a move will be beneficial to your company. Consider the fact that both tax and legal issues come to light with such a change, and you will not want to miss any crucial details as much as possible.

Changing From a Simple to a More Complex Business Structure (Sole proprietorship or simple partnership to LLC or Corporation)

In most cases, simpler business structures such as sole proprietors or simple partnerships choose to change to a more complex one, such as an LLC or a corporation, as owners take on new partners or investors. However, before changing the structure of a sole proprietorship to a more complex one, there are steps you have to take.

First, you have to register with the state wherein you conduct your business. You will need to fill up some forms and send them in. Once the paperwork is approved, you have to create a formal operation agreement or partnership agreement that serves as a legal document outlining ownership, rights, and responsibilities of the owners or partners.

There are even more paperworks to be done in changing your business structure to a corporation, because for this, you will also have to act like a corporation – meaning you have to choose officers, the board of directors, and even create a shareholders agreement. The shareholders agreement is similar to a partnership agreement in a way that it should cover the rights and responsibilities of the owners. For both, it is best to run the documents through an attorney.

Not only will you need an attorney look over the agreements, there are several details that you will also have to handle in order to make sure that your change in business structure is recognized. Among these include the following:

• Filing a “Doing Business As Form” in order to let the government know that you are no longer operating as a sole proprietor or simple partnership.
• Updated registry with the IRS because you will need an updated Employer Identification Number for filing your taxes and for paying your employees.
• Register your new, desired business structure with the state
• Re-apply for the required state licensures as applicable
• Update bank accounts in order to reflect your new business
• Update insurance records in order to reflect the change in your business structure
• Create or Update partnership agreement in order to reflect the changes that will be made in the company.
• Check tax and legal documents to ensure that all the paperwork is filed and completed accordingly.

Remember that it is important to stay in touch with financial and legal advisors, especially when it comes to filing forms in order to ensure that the change in business structure becomes official. However, there are other obligations that will change as well, such as dealing with corporate taxes or handling with payroll once there are more employees to be hired. For this, it is important that you keep in touch with your legal and financial advisors, as their expertise could be of much help to you in the future.

Changing from a Complex to a Simple Business Structure(LLC or Company to Sole Proprietorship or Simple Partnership)

Although not completely unheard of, it is a bit unusual for a more complex business structure to want to change back to sole proprietorship or simple partnership. This happens especially when the business does not go as planned, or if a person may want a simpler option to continue running a company.

It is important to take note however, that sole proprietors or simple partnerships do not have protected liability that corporations enjoy, and this could make the difference in terms of work or potential liabilities.

In cases of corporations converting to simpler business structures, it is essentially a process of dissolving the corporation and creating a new sole proprietorship business. To do this, it is important that you carefully consider the tax consequences and time commitment.

Take note of the following steps in changing your business structure:

• Ensure the vote of the board. Changing the corporation’s entity is a major decision that must be voted on by the board of directors and shareholders of the corporation. The bylaws and agreements as drafted in the formation of the corporation should determine the number of votes required to make such a decision.
• File the necessary dissolution documents. This is important to file with the secretary of the state where the corporation is doing business. The dissolution date should be specified in these forms.
• Liquidate the corporation’s assets and pay off all the debts. While the sole proprietor has the option of purchasing the corporation’s assets, it is important to note that debts and dividends must first be paid off. The assets that remain, if any, shall be distributed as dividends to shareholders of the corporation as stated in the shareholder agreement. Assets that can be bought by an individual, if desired, include inventory, customer lists, trademarks, and leases.
• File and verify forms for the IRS. Corporations with shareholders receiving distributions of over 4600 shall need to file forms 1099-DIV while a separate form (996) shall be submitted to report the dissolution of the corporation.
• File state and federal tax returns and pay outstanding taxes. Take note that in filing the returns, you should check the box indicating it is the final return to be made by the corporation. In your outstanding taxes, you will have to pay sales, excise, and other taxes that the corporation still owes the state, as necessary.
• Register for a new employer identification number. This will be necessary for you to be able to hire new employees under the new business structure. Simply visit the IRS EIN page and apply from there. Follow the on-screen instructions to set up an EIN for your sole proprietorship or simple partnership business.
• File for a fictitious business name. For those who plan on operating under a different name that your own, it is necessary to register a fictitious business name or “doing business as” name. This document is typically filed with the secretary of state where the business will operate.
• Reapply for the necessary licenses and permits. Take note of the requirements of the state regarding professional licenses if you plan on changing your business structure. The applicable licenses normally depends on the type of business that you are planning, so check in with your local licensing department which licenses or permits you are required to file or reapply.
• Notify necessary individuals in the change of business structure. This is not only limited to your business partners, but more importantly, you should inform your insurance company and bank about the change, as well as suppliers, customers, and employees as applicable.

From Non Profit to Profitable Companies

Nonprofit organizations are tax-exempt, which is why many think changing this status could be odd. However, there are times when converting a nonprofit to a profitable organization can make a positive impact, especially when there is a need to obtain loans or business affiliations to help the organization provide services to the community. However, there is more to changing a status than simply relinquishing it, especially if it involves a change in tax returns.

Here are ways to change your nonprofit organization to a for-profit company:

• Meet your tax adviser so that you can review your nonprofit’s tax returns and take a look at the income potential.
• Speak with the board of directors to discuss the financial options and vote on the change.
• Nonprofits cannot make big decisions without going by the board first, so review the advantages of converting to a for-profit company.
• Notify the IRS of the change, including the reason for the termination of the nonprofit status of the organization. Along with this is a certified copy of a liquidation plan, fair market value of the organization, as well as a list of all asset recipients if they are to be distributed.
• Contact your state’s attorney general so that you can request any forms or paperwork required to change your organization’s status to profit. Each state has different requirements.
• File a final nonprofit tax return within four months from the termination of the nonprofit status. There are different forms for different amounts at the gross receipts, for instance form 990-N are for receipts less than $25,000, while form 990-EZ is used for organizations with gross receipts that are less than $1 million.
• Consider other documents that you may need, including organization bylaws, donor lists, and previous tax returns, which may be necessary for the change in status.

In choosing the right business structure for your business, you will have to consider your own tolerance for risk of personal assets, as well as tax considerations for your business profits. Careful consideration of the right business structure is crucial due to the implications of your IRS taxes. It will determine whether or not your personal property will be protected in case your business goes backward. Other than that, you will also have to consider management of the business as well as your long-term plans.

Business structures are created by state, and by law, so there are variations for each country or state where you want to start your business. While switching business structures is possible, it can be complicated and expensive in terms of legal fees, which is why it is best that you decide early on which type of structure you will want to run for your mid- or long-term goals.

Your tolerance for risk of your personal assets actually comes into play, considering that running a business will have you at greater risk for a lawsuit — so there is money involved. This is especially important when you want to create a sole proprietorship business or a general partnership, where creditors can go after your own assets such as real estate, cars, and even bank accounts. If you are not willing to put your own assets to risk, you will want to choose a safer structure.

Finally, the right structure for your company does not only depend on the state of the business that you are seeing in the immediate future: it also depends where you want to be in five, ten years or even decades from now. If you want a fast growth for your business, you may want to create C corporations that allow for multiple kinds of stocks. Or you may want to consider whether or not you want to create a legacy: for instance some companies get dissolved with the death or loss of the owner unless specified beforehand.

Whichever type of business structure you decide on for your startup business, it is important that you understand the similarities and differences of the structures. You should also weigh the advantages and disadvantages of each type, depending on what is most important to you. Finally, assess your own desires to help determine your situation for the business, Remember that setting up your business structure is not the most exciting part of the business, however, it can be among the most important. So take your time to work through the details in order to protect yourself, as well as your personal assets in the future.