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After you started the process of finding a name yesterday, today you’ll choose the appropriate corporate form for your business idea. I cannot give you any legal advice, so you’ll have to consult a suitable lawyer. However, I would like to briefly introduce the most important forms in the US and their advantages and disadvantages.
As its name implies, a sole proprietorship is a company owned and operated by a single person. If your business is not a corporation or limited company and you are the sole owner of your business, it is a sole proprietorship. As a sole proprietor, any business income you earn is considered personal income when you file your taxes. The downside of setting up your business this way is you are personally liable for any money your business owes and are personally vulnerable for any lawsuits filed against your business.
Limited Liability Company (LLC)
An LLC is a hybrid business that marries some of the features of a corporation with some of the features of a sole proprietorship. Unlike a sole proprietorship, if you are registered with the government as an LLC, your business assets and liabilities are legally separated from your personal assets and liabilities. Moreover, unlike a corporation, income you earn from your LLC is treated as personal income, just like it is if you are a sole proprietor.
A general partnership is a business arrangement by which two or more individuals agree to share in all assets, profits, and financial and legal liabilities of a jointly-owned business. In a general partnership, partners agree to unlimited liability, meaning liabilities are not capped and can be paid through the seizure of an owner’s assets. Furthermore, any partner may be sued for the business’s debts.
Each is responsible for their personal tax liabilities—including partnership earnings—on their income tax returns as taxes do not flow through the general partnership.
A limited partnership (LP)—not to be confused with a limited liability partnership (LLP)—is a partnership made up of two or more partners. The general partner oversees and runs the business while limited partners do not partake in managing the business. However, the general partner has unlimited liability for the debt, and any limited partners have limited liability up to the amount of their investment.
A limited partnership exists when two or more partners go into business together, but one or more of the partners are only liable up to the amount of their investment.
Incorporating means to create a corporation, which is the act of legally separating a business from yourself. It becomes a stand-alone entity that generates income and pays its shareholders and/or employees. There are a few varieties to choose from in the United States but since the chances are low that you want to start your business as a cooperation now I leave this to your advisors, that you then definitely need.
Effects of the choice of legal form
The legal form also impacts other factors, such as the registration formalities at the time of establishment, the necessary initial capital, etc. See the table below to choose the most appropriate legal form for you:
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Figure 1: Business Structure Alternatives (Source: www.civil-law.com)