When beginning a business, you must decide what form of business entity to establish. Your form of business determines the amount of regulatory paperwork you have to file, your personal liability regarding investments into your business, and the taxes you have to pay. The most common business structures include:
Sole Proprietorship - A business owned and managed by one individual who is personally liable for all business debts and obligations.
Partnership - Two or more people share ownership of a single business.
Corporation - A legal entity owned by shareholders.
S Corporation - A special type of corporation created through a tax election. An eligible domestic corporation can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S corporation.
Limited Liability Corporation (LLC) - A relatively new, hybrid-type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.
Non-Profit - An organization engaged in activities of public or private interest that are motivated by making a profit. Some non-profits are exempt from paying federal taxes.
Cooperative - A business or organization owned by and operated for the benefit of those using its services. Cooperatives are not a legal structure.
For young entrepreneurs, it is probably better to stick with a sole propietorship which is the simplest business structure there is. For other structures, we strongly recommend that you consult an accountant. Here are the details of sole propiertorships.
The vast majority of small businesses by young entrepreneurs start out as sole proprietorships. These firms are owned by one person, usually the individual who has day-to-day responsibilities for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, you are one in the same with the business.
Advantages of a Sole Proprietorship
Easiest and least expensive form of ownership to organize.
Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit.
Sole proprietors receive all income generated by the business to keep or reinvest.
Profits from the business flow directly to the owner's personal tax return.
The business is easy to dissolve, if desired.
Disadvantages of a Sole Proprietorship
Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk.
May be at a disadvantage in raising funds and are often limited to using funds from personal savings or consumer loans.
May have a hard time attracting high-caliber employees or those that are motivated by the opportunity to own a part of the business.
Though you do not have to worry about this right now,some employee benefits such as owner's medical insurance premiums are not directly deductible from business income (only partially deductible as an adjustment to income).