L EGAL S TRUCTURE
B efore you opened a business, you lected the legal structure that hopefully best suited your needs and tho of your particular business at the time. Now that you have been in business a while you might want to review your earlier decision. In choosing a legal structure for a business, you should consider the following as you review your current situation:
∙What legal structure best rves the purpo and goals of the business as it exists today and the business that is apt to exist in the potential (e.g., five-year) future?
∙What is the risk and what is the amount of the investors' liability for debts and taxes under your current legal structure? ∙What happens to the business if something happens to one of the principals?
∙What is the influence of applicable laws on your business and would changing your business structure help?
∙Can you better attract investment capital by making a change in your legal structure? If so, how?
∙What are the additional costs or savings of running your business under each different possible structure?
∙Is making a change in business structure worth the extra record keeping and reporting that may be required? Remember, professional advice is almost always needed to lect or change the legal structure for a business—ek out assistance before you act!
TYPES OF BUSINESS STRUCTURES There are four principal types of business structures: the proprietorship, the partnership, the limited-liability company/ partnership (LLC/LLP) and the corporation. Importantly, within the a corporate legal情人节英文
structure, there are both “C” and “S” types of corporations.
All of the business structures have their advantages and disadvantages. There is no one …best‟ legal structure for all business; otherwi, everyone would choo the same structure, which they obviously don‟t!
The decision to stay as you are or change your legal structure should be bad on your specific circumstances, goals, and needs. The structures, along with their basic advantages and disadvantages, are listed below. That said, it‟s wo rth repeating: the discussion following is not exhaustive; you need to e your accountant/CPA, and perhaps your business attorney, before finalizing your business legal structure of choice.
Also remember that you can change your business legal structure - you are not locked into it forever. Note however that there are strict IRS and state regulatory limits in this regard, so it‟s important to choo (or change) your legal structure wily.
Sole Proprietorship
Sole proprietorship is defined as a business owned and operated by one person. It is the simplest form of legal structure. Likely many small business owners are in this situation today. To establish a sole proprietorship, you simply obtain the necessary licens and begin operation. Advantages:
∙Ea of formation.
∙Sole ownership of profits.
∙The owner has control of all decision- making.
a new day has come∙ Flexibility in day-to-
day management.
∙ Relative freedom from government in-tervention.
Disadvantages:
∙Unlimited liability. This extends to all of the prop rietor‟s asts,
including the home and car, but may
be lesned by proper insurance
coverage.
∙Unstable business life. The business may be terminated upon the death or
disability of the owner.
∙Less available capital, generally totally dependent on the ow ner‟s
asts, business and personal.
∙Difficulty in obtaining long-term financing.
∙Relatively limited viewpoint and experience.
Partnership
If you are a sole owner, one of the ways to initially expand your business (and/or to obtain additional funding) is to take on one or more partners. A partnership is an association of two or more persons to carry on as co-owners of a business. A partnership is a formal arrangement that requires a formal written document to establish its existence. This document outlines the contribution by the partners into the business (financial, material, or managerial) and generally delineates the roles of the partners in the business relationship.
Advantages:
∙Ea of formation.
∙Ea of operation.
∙Simple bookkeeping and accounting.
∙Simply and directly rewards each partner, generally bad upon net
profit.
∙Growth and performance facilitated.
∙Flexibility in decision-making.
broad∙Relative freedom from government control and special taxation.
Disadvantages:
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∙Unlimited liability of at least one partner.
∙Unstable life in the n that elimination of either partner
constitutes automatic dissolution of
the partnership.
∙Difficulty in obtaining large sums of capital.
∙Firm bound by the acts of one partner as agent.
∙Difficulty of disposing of partnership interest.
∙Higher (personal) tax rates if profits are healthy.
Limited Liability Companies and Partner-ships
A popular variant of the standard partnership is the Limited Liability Company (LLC) or the Limited Liability Partnership (LLP).
The LLC and LLP aro from the desire of business owners to adopt a business structure permitting them to operate like a traditional partnership. This distributes the income and income tax to the partners (re-ported on their individual income tax returns), but also protects them from personal liability for the business debts, as with the corporate business form.
As a parate entity, the LLC can acquire asts, incur liabilities and conduct business. As the name implies, however, it provides limited liability for the owners. The owners risk only their investment. Personal asts are not at risk.
Advantages:
∙Limited liability without limits on management participation.
∙Flexible ownership and capital structure.
∙No double taxation.
∙Allocation of tax benefits among members.
Disadvantages:
6to23∙Higher initial cost to establish than simpler forms of business.
∙Poor tax treatment of fringe benefits.
∙Harder to obtain financing becau of the limited liability.
The Corporation
Depending on the actual or expected size of your business, you may want to consider incorporation. Incorporation is by far the most complex form of business structures.
Importantly, a corporation is a state-regulated legal entity making the company distinct from the individuals who own it. In California, a corporation is formed by the authority of the State of California (v for more information).
designation
All corporations are comprid of three groups of people: shareholders, directors, and officers. The procedure ordinarily required to form a corporation begins with a subscription for capital stock,六级考试
and a tentative organization created. Then, approval must be obtained from the state (in California, the California Secretary of State). This approval is in the form of a charter for the corporation, stating the specifics and limitations of your particular enterpri.
Advantages:
recognize怎么读∙Limited liability of stockholders.
∙Ownership is readily transferable.
∙Separate legal existence.
∙Tax rates for corporations are different than tho for private
individuals, usually advantageous,
but not always.
Disadvantages:
∙Activities limited by charter and various laws.
∙Extensive government regulations and reports.
∙Generally has limitations as to the number of stockholders, citizenships
and other factors.
Subchapter S (or “Sub-S”) Corporation
OK, this gets a little complicated, but follow along: the Subchapter S Corporation is a legal corporation that is afforded special tax treatment under Subchapter S of the Internal Revenue Code.
Under California (and other state laws), the S Corporations retain the normal features of corporations, to include limited liability, but for federal tax purpos they are treated much like sole proprietorships and partnerships.dominica
The profits are taxed at the individual rather than corporate rate; hence, the stockholders report corporate income, loss, deductions, and credits on their individual tax returns.
In most all other aspects, the S Corporation operates in compliance with state and federal laws relating to corporations, just as a regular (or “C”) corporation.
Importantly, the law prohibits S incorporation for the sole purpo of obtaining limited liability status.
Advantages:
∙Limitations of the stockholders‟ liability to a fixed amount of
investment.
∙Ownership is readily transferable.
∙Separate legal existence.
∙Stability and relative permanence of existence.
∙Relative ea of curing capital.
Disadvantages:
∙Activities are limited by charter and various state laws.
∙Minority percentage stockholders may be exploited.
∙Extensive government regulations and reports.
∙Fewer financial incentives for the manager.
∙All Sub-S corporate profits are …pasd through‟ to your personal tax
return at higher tax rates than for a C
Corporation. If your Sub-S
Corporation is highly profitable
(bottom-line “net”), then you will
英语写信范文probably be paying more tax via
your personal (1040, Schedule C)
return.
The “C” Corporation
The C Corporation is similar to the S-
Corporation just discusd, but with some important differences regarding human resources/employee laws, pensions, benefits, and taxation. That said, the major factor (this varies state-by-state) is that in a C- Corporation, you cannot pass net profits through to your personal (1040) tax return, as you can with a Sub-S corporate structure.
In a C Corporation, tax on the corporation‟s net profit is calculated at (lower) federal and state corporate tax rates, while salary paid to employees, including the business owner(s) working for their corporation, are taxed at the federal and state personal (higher) tax rates. Confusing? Well, yes, perhaps! A good CPA can find the optimum balance in taxation - in other words, how much pay you actually take out of your C Corporation can become a major tax issue.
Okay, S or C - what‟s right for you? Good question, but, difficult to answer in this basic prentation. The best cour of action is to initially meet with your CPA and even possibly with your legal counl to determine the optimal choice for your circumstances.
In general, tax-wi, with all other things equal, higher corporate net profit lends itlf more to a C Corporation structure. Lower corporate net profit lends itlf more to the Sub-S corporate structure. Finally, remember that you can go back and forth switching between the two corporate structures, but you will be limited by state law as to how often
Finally, remember that you can go back and forth switching between the two corporate structures, but you will be limited by state law as to how often action is to initially meet with your CPA and even possibly with your legal counl to determine the optimal choice for your circumstances.
