Forming a Business
What type of business is right for you?
You should ultimately recruit the services of a business attorney to help you decide how to form your business, but we’ve outlined some of the types of businesses we’ve seen in the past to help get you started. We are not attorneys, tax advisors, or accountants, so the information provided below is not intended to be legal or financial advice. It is just the basics to get you pointed in the right direction.
A sole proprietorship is typically a single person, who is legally bound to the business. There are no legal distinctions between them and the business. This person assumes responsibility for all profits, taxes, losses, and debts. Unfortunately, this means that the inventor’s personal assets could be at risk.
On the bright side, sole proprietorships are typically easy to file and obtain. Sole proprietors are also able to hire employees or independent contractors. When it comes to tax season, you file your sole proprietorship revenue, taxes, and debts right alongside your personal taxes.
A partnership is similar to a sole proprietorship, except that it is made up of two or more people. There are other types of partnerships, such as limited partnerships and limited liability partnerships. You should also know that each state has its own regulations regarding partnerships.
In a limited partnership, at least one person must bear responsibility for liability, and at least one person is considered a limited partner. The limited partner has no management authority but is not liable. This mechanism helps protect the limited partner.
In a limited liability partnership, all partners can have limited liability, similar to shareholders. Unlike shareholders, they still retain the ability to manage the business.
Limited Liability Company
Limited liability companies are intended to combine the tax benefits of a partnership with the liability benefits of a larger corporation. These are one of the most common types of business for entrepreneurs. An LLC offers flexibility for how the business is run, how taxes are filed, and who can be a part of the venture.
A corporation is an organization that is considered a single legal entity and treated as such. It is able to have multiple owners and issue stock. There can also be “for profit” and “not for profit” corporations. Usually stock holders or “shareholders” don’t manage the company, they use a board of directors instead. Corporations offer great protection for personal assets, but owners may be liable for the amount of money they have invested. There a few different types of corporations including C Corporations and S Corporations.
C Corporations can have any amount of shareholders. They are great for companies looking to seek investors and even go public. While C Corporations have many tax benefits, they do experience “double taxation”. This is when the corporation pays taxes on profit, and then shareholders pay taxes again on their dividends. Most investors prefer C Corporations for the tax benefits. To learn more about why investors prefer working with C Coporations, check out this article by Truic.
S Corporations can only have US citizen investors and are limited to 100 issued shares. They also pay very little in company taxes but members still have to pay taxes on an individual level.
Want to Learn More?
To learn more about forming your own business, entrepreneur.com has a great article with a bit more information. However, we do advise that you seek out the guidance of a trained professional such as a financial advisor or business attorney before forming your business. We’re not qualified to offer any advice on which business type and structure is most appropriate for you.
In our next article, we’ll look at how to build your product development plan.
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