Pick the Legal Structure for Your Business

Your business needs to find the best legal structure to use.

In a previous post we discussed a checklist of 29 steps when starting your Business. This topic was number 4.

Pick a legal structure and file any necessary documents.

Beginning businesses will have to choose a “type of organization” for tax reporting. Types include sole proprietorships, partnerships, and corporations.

Making the business type choice should be done with some knowledge and professional advice from an accountant and a lawyer. There are some options, especially when it comes to the types of corporations. Two very good places to go for information about the options are the Internal Revenue Service web site and the Small Business Administration web site. The rules for all business types will be a State issue, so the exact treatment for business types are found in the State Code. An example of a good source of information in California is the Secretary of State’s web site.

The main differences between business types are tax rules, liability of the owners for the business activities, tax filing requirements and annual fees. Because of the number of people involved, bigger firms generally become corporations. Corporations have tax advantages and liability limits. Articles of Incorporation and Bylaws must be drafted and registered with the Secretary of State where the business is located and fees are required. Annual filings and fees follow. A lawyer can help you through the research on the different types of corporations, and what works for your situation. There are some new types of corporations which include Benefit Corporations and Special Purpose Corporations which have been established to help the green business community.

Partnerships have more filings and fees than sole proprietorships and can be complicated like corporations. The responsibilities, investment, control, and replacement of the partners should be documented in a partnership contract. Since partnerships are a form of business that can result in disaster with the change in thinking by any of the partners, it is good to do some research and have a solid contract. A beginning business that needs information about the requirements and practices of different business types can find books and information at web sites like Nolo Press.

The most simple form of business type is a sole proprietorship. Sole proprietorships must stick to simpler accounting practices and have the shortest tax return form. Most beginning business will want to be this type because of the lower cost and simplicity.

To be an actual business as a sole proprietor is the most simple. You claim a name and you begin making sales. The business that is using a name other than the owner’s name must file for a fictitious business name. Using either the owner’s real name or a fictitious name, a sales tax account must be established in the State where the business is located and tax returns made at the end of the year. This is all that is required to be an actual business using the sole proprietorship type.

Actually, to be a business requires only one thing. That is to be making sales. If you become a business by making sales, then filing tax returns is required by law. The tax return used depends on the “type of business” choice, and since these are necessary documents, the beginning business must make a choice. Once a form is chosen, it may be difficult to change.



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