Business formation is a necessary early step when starting a business, whether you're registering a simple DBA, incorporating or forming a partnership. The way in which your business is formed will determine the personal liability of the founders, how taxes are paid, and other important details.
Selecting the right entity the first time is very crucial. There is a lot to consider at this phase including but not limited to tax planning, budgeting, accounting methods and other factors.
If you're in business for yourself and you haven't created a formal business structure, then chances are, you're already a sole proprietor–so make sure you understand the implications.
Sole proprietors are personally liable for the debts of their business. If the business is sued, your house, savings, and other personal assets are at risk.
A sole proprietor is responsible to report all business profits as personal income, and pay self-employment tax on those profits, to cover Social Security and Medicare.
Hard to Raise Capital
There are no partners, shares, or membership interests in a sole proprietorship so it's generally difficult to attract investors without changing your business structure.
It's a valuable asset to your business
Your business name is how customers find and recognize you, so a unique DBA can have a positive impact. The registration process can also help you avoid legal problems by making sure you don't choose a name that's confusingly similar to another business in your area.
Expand and grow your business.
Name new business lines and keep them separate to cut down on paperwork and expenses.
It may be legally required.
If you use a different business name other than your entity's official name or your personal name.
What is a general partnership?
A general partnership is created any time two or more people agree to go into business together, whether or not they have a written contract. It's a good idea to formalize the details in a partnership agreement that specifies each partner's rights, responsibilities, and share of the profits.
Once partners are engaged in a business, each partner is personally liable for the actions of that business, including the obligations of the other partners. There are no shields against personal liability.
A general partnership doesn't pay income taxes. Instead, profits and losses flow through to each of the partners, who are responsible to report it on their personal income tax returns.
Other Partnership structures could help shield you against personal liability.
A limited liability company, or LLC, is a business entity created under state law that combines characteristics of both a corporation and a partnership. Like a corporation, the owners of an LLC are generally not personally liable for company debts. Like a sole
proprietorship or a partnership, an LLC has operating flexibility and is, by default, a "pass through" entity for tax purposes. This means that the LLC does not pay taxes on its profits, but instead, profits and losses are "passed through" to the owners, who must then pay tax on their share of LLC income.
Fewer formalities and legal requirements For example, you don't have to hold board meetings or maintain records detailing how every company decision is made. Ease of setup and management Just set up and get to running your business.
S corporations have only one level of taxation. The shareholders still have to pay taxes on money that they receive from the corporation, but an S corporation does not pay taxes on its net income. While the S corporation is popular among small business owners, C corporations have greater tax planning flexibility.
If a business operates as a corporation, the business owners, called shareholders, are not personally liable for debts or other claims against the corporation. That's because the corporation is a separate legal entity from its owners. If a corporation complies with the formalities required for it to be treated as a separate legal entity, then anyone seeking to collect a debt from, or enforce a claim against, a corporation, would not be able to collect from the shareholders themselves. They would only be able to pursue the assets held in the name of the corporation.
Income from C corporations are subject to double taxation; that is, the corporation pays taxes on its net income and then the shareholders also pay taxes on the income that they receive from the corporation.