• May 17, 2021
  • Posted by General Electric Credit Union
  • 4 read

Do You Know the Best Option for Structuring Your Business?

Do you have an amazing idea, but you’re not sure where to start when it comes to structuring the business? First off, congratulations on your new venture! Below are four different structure types and information on ownership and liability so you can get the ball rolling on your business plan.

Sole proprietorship

  • Who owns it? One person.

A sole proprietorship essentially means the business is tied to an individual. If the owner leaves, the business dissolves. Business assets and liabilities are considered personal, meaning you are responsible for any debts and obligations of the business.

When tax time comes around, the owner of a sole proprietorship reports business income and losses on a personal tax return. Your business activities will be automatically considered a sole proprietorship unless you register as something else.

This is beneficial for those who are trying out a business idea and may not want or have a formal business yet.

Partnership

  • Who owns it? Two or more people.

There are two types of partnerships. The business is owned by two or more people under both types, but the liability differs. A limited partnership (LP) means one partner assumes unlimited liability while other partners only have partial liability. Those with limited liability typically also have limited control over the business.

Profits are reported under personal tax returns just like a sole proprietorship, but the partner with unlimited liability will also pay self-employment taxes. In a limited liability partnership (LLP), every partner shares limited liability. This way, they won’t be responsible for the actions of other partners.

A common example of partnerships is professional groups like a law firm. Like a sole proprietorship, a partnership is a simple approach to structuring a business and may also be ideal for someone testing a business idea.

Limited liability company (LLC) 

  • Who owns it? One or more person(s).

Owners of an LLC are called members and can be a person, company, or other LLC. No members are personally liable for the LLC’s debts or liabilities. Come tax time, an LLC’s profits are passed through each members’ tax return as personal income.

If a member should pass away, the LLC is at risk of dissolving. You must secure a business continuation agreement to transfer or sell the business. Without one, the remaining members must dissolve the LLC and start a new one.

Corporation

  • Who owns it? One or more person(s), with specific requirements for different types of corporations.

A corporation operates for profit and is legally separate from its owners. These entities can sue and be sued, borrow from financial institutions, and own assets among other things. Corporations have an edge when it comes to raising funds because they can sell stocks, making them a good option for medium- to higher-risk businesses or companies with plans to “go public.”

Corporations pay income tax on profits and may even be taxed twice when dividends are paid to stockholders. There are several types of corporations available depending on your needs. For example, an S corporation is designed to help owners avoid double taxation.

A nonprofit corporation follows a lot of the same rules as a normal corporation, but they can receive tax exempt-status because their work benefits the community. There are special rules in place for profits, including one banning political campaign contributions.

This is just a brief overview of the many ways to structure a business. If you’re still not sure which is right for your idea, watch GECU’s on-demand webinar Business Structure and Licensing.

Professionals will walk you through business structuring options and what you can expect from the process! Plus, visit our CU Events page to see what other webinars you can register for.

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