Do you know the best way for your small business to be set up legally? The way a business is set up is called its "legal structure." Choosing the best legal structure for your business is important because it affects everything from how much you pay in taxes to how financially responsible you are for your business. Most businesses have a sole proprietorship, a partnership, or a corporation as their legal structure.
A sole proprietorship, which is when one person owns a business, is the most common and simple legal structure. When it comes to taxes, the business owner and the business are the same thing. Profits from the business are personal profits and are taxed as personal income. The business owner is financially responsible for the business, and their own assets will be used to cover any business losses or debts.
A partnership can be filed for by two or more owners of the same business. This type of business structure is a lot like a sole proprietorship. All partners are financially responsible for the business's debts, and the tax burden is split among the partners in proportion to their share of the business.
The corporation is the most complicated and hard to get type of business structure. In a corporation, the owners and investors are taxed and paid income separately from the business. They are also not fully responsible for the company's debts.
S-Corporations, also called "Single Person Corporations," are an option for one business owner who wants to form a corporation to save money on taxes. As the only person who works for the business, they get a salary from the profit and pay the right amount of income tax. The rest of the business's profit comes to them as dividends, which are taxed much less. The S-Corporation owner saves money on taxes because the profit is split into salary and dividends.
Consider that most small businesses start out as sole proprietorships or partnerships when choosing the best business structure for your company. These business structures don't require much paperwork and are easy to set up. They work best for small businesses that are less likely to lose a lot of money or get sued. When your business takes on more risk, deals with more debt, or needs a lot more money, you might want to turn it into a corporation to protect your personal assets and get access to more money.
