One of the things that every entrepreneur struggles with is choosing from the several legal forms of business. Each of these legal forms of business has its own set of advantages.
Read this post to learn more about the five different business structures and their key characteristics. This will help you identify the right fit for your business.
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The Five Legal Forms of Business That You Can Choose From
Here are the five basic legal forms of business, also known as business structures, that you can form to get started:
1. Sole Proprietorship
A Sole Proprietorship is a legal form of business or legal structure that is owned and run by a single person referred to as the sole proprietor.
What are the key features of a Sole Proprietorship?
Here is a quick list, for your reference:
- It can have only one owner.
- The financial liabilities of the business fall on the sole proprietor, making them personally responsible for their company.
- All of the firm’s profits and losses go directly to the owner.
- It is fairly easy and comparatively cheaper to start Sole Proprietorships.
- The small business owner has complete control over the business administration.
- The owner can file the tax returns as part of their personal tax returns.
- It is difficult to secure funding for Sole Proprietorships so the owner needs to have enough capital to get the business started.
Overall, it is a good option for you to start a Sole Proprietorship if you have enough capital and want complete business ownership.
This is one of the legal forms of business that can have more than one owner. If you want to start a business with two or more partners, then this is a good option.
Here are some of the key features of a Partnership firm:
- All corporate profits and losses are shared between the partners as per previously agreed-upon terms.
- Partners share ownership of the firm.
- All of the partners have a say in business decisions and administration.
- The business is considered as a separate entity and its tax returns are filed as such.
- It requires forming a detailed partnership agreement, which the firm’s executives decide, before starting the business.
General Partnership firms do not provide personal liability protection and each partner is responsible for paying off their share of company debts. Use our business formation services to establish a Partnership firm quickly and efficiently.
3. Limited Liability Company (LLC)
This is the most preferred organizational structure, legal form of business, or business structure as it can give you the best of both worlds. It provides limited liability protection while also giving you the flexibility of a Sole Proprietorship or a Partnership.
Here are the key features of an LLC (Limited Liability Company):
- It can have a single member or multiple members.
- These members can be individuals as well as other business entities. However, banks and insurance companies can’t be members of an LLC.
- Members can choose to be active or inactive partners.
- Members are not personally responsible for the company’s financial liabilities and their personal assets are protected.
- LLCs are pass-through entities and can be taxed as a Sole Proprietorship (only a single-member LLC), Partnership (a multi-member LLC), and even a Corporation.
It is slightly more complicated to form an LLC than a Sole Proprietorship but it is still comparatively easier than incorporating a Corporation.
This is one of the legal forms of business where the business entity is taxed separately from the owners.
Here are the key features of a C-Corporation:
- Owners have limited liability
- Double taxation (Corporation and shareholder earnings)
- Easy to raise capital
- Transferable ownership (in the form of shares)
This is one of the preferred legal forms of business for big companies as it protects the personal assets of its owners by separating them from business assets. We can help you form a Corporation to get all of these benefits and reduce risk.
This is a form of a Corporation where the owners choose to be taxed only on their personal incomes, thus avoiding double taxation.
It has most of the features of a C-Corporation and mainly differs in how the business taxes are filed. Find out the requirements of starting an S-Corporation in your state or fill out our S-Corporation registration application to get started.
1. Which is the best among the legal forms of business?
All legal forms of business have their own advantages and disadvantages, and the best is subjective.
However, most new business owners prefer forming an LLC (Limited Liability Company) over other legal forms of business. It is a hybrid between Corporations and Sole Proprietorships/Partnerships and offers the best of these legal forms of business.
2. Which legal forms of business provide the most flexibility?
LLCs are the most flexible legal business structures.
They allow you to choose how you want the company income to be taxed while also providing you with personal liability protection. LLCs can have a single member or multiple members. It is fairly easy to register an LLC.
3. Which are the best states in the U.S. for tax purposes?
Wyoming and South Dakota do not levy any tax and are the most tax-friendly states. By far they are one of the best states to form an LLC.”
4. How do I choose from the basic legal forms of business organization?
That completely depends on your priorities in terms of how you want to be taxed, whether or not you want full control over the company, and if you have enough funds.
Overall, LLCs strike a good balance between Sole Proprietorships and Corporations and are usually the best option for small business owners.
5. Which legal forms of business are the easiest to set up?
A Sole Proprietorship is one of the easiest legal forms of business to set up and get running.
Use our business formation services to register your business regardless of which legal form of business or business structure you choose.
These are five of the most common legal forms of business that you can choose to start your new business. A Corporation is a preferred business form for large companies while most small businesses choose to form a Limited Liability Company (LLC).
Registering a new business involves a lot of steps and can be quite overwhelming for a first-time entrepreneur. We can help you take care of that by completing all of the documentation and legal formalities on your behalf.
Use our services to start your business in a quick and flexible manner.