Tag: business entity

Categories
Strategy

How To Select The Ideal Business Entity

Choose the right Business Entity for your Company

Starting is a business is not easy. Apart from the many decisions that you need to make, one important decision is to select a business entity for your company. An entrepreneur needs to be very clear about choosing a business entity as this decision will affect your taxes you pay, your growth plans and even your ability to raise money. 

While choosing a legal or business entity, you should be very clear about-

  • The kind of work you are going to do
  • Under what government or taxation norms does it fall into?
  • How can I seamlessly fulfill my future business requirements
  • Only after selecting a business entity, you can register your business with the state

Here are the major types of business entities you can select from:

1. Sole Proprietorship

  • One of the most easily formed entities is sole proprietorship as both, the managerial control & financial liabilities remain with the owner
  • If you want to be your own boss and don’t want to enter the hassle of having multiple partners or too many obligations, then this is the best decision for you
  • It’s simple and cheap, you can think of the business structure. The only fee you need to pay is license fee and taxes
  • Under a sole proprietorship, you are entitled to some tax deductions as well

2. Partnership

  • This business entity is run by two or more people together who have a share in profits as well as loses too
  • This kind of an arrangement is ideal if you want to start a business with a family member, friend or a business partner where all share the profits and losses and are involved in making important decisions regarding the business

There are 2 types of partnerships- General and Limited partnership

  1. General Partnership- In this arrangement, all profits and losses are shared equally
  2. Limited partnership- Limited partnerships have one partner with unlimited liability, and all other partners have limited liability

The benefits of a business entity like the partnership is that it can be formed without any hassle and does not cost a lot 

  • You work as a team. Partners are in the business not only to share the profits but also to share the challenges that come along during setting up a business. Ideas can be shared and learning from each other is natural.
  • However one should only enter a partnership when you can work in tandem with another person and accept that the profits are not solely your profits!

3. Limited Liability Companies (LLC)

  • This is a mixed structure business entity that allows the partners or shareholders to limit their personal liabilities but still enjoy the tax benefits of a partnership. The members of an LLC can be individuals, a partnership or a corporation
  • The major benefit of an LLC that in most cases the partners are protected from personal liability the same way as shareholders are in a corporation.
  • You do not need to file corporate tax as an LLC, but you need to file your profits and losses and submit it with your tax return under schedule C

4. Corporations

  • Corporations are business entities separate from their owner. It handles the responsibility of an organization and running a business
  • The corporation is taxed and is also fully liable for its actions
  • The benefit of forming a corporation is that it is separate from your personal liability and the disadvantage is that it is a bit costly to form this legal entity
  • There are several types of corporations, such as C corporations, S corporations, B corporations, closed corporations, and nonprofit corporations. However, the S-corporation was formed for small businesses to avoid double taxation
  • When your business is a corporation, the chances of you raising more capital from investors increase because funds can be raised through selling stocks which can be a luring option

While choosing a business entity you need to compare the pros and cons and how it will benefit you. The tax implications, ownership rules, and future needs should be in your favour. It is absolutely important to take advice from a business consultant/expert or your chartered accountant before finally arriving on your decision.