A small business can be defined as a business with a small number of employees. Though the legal definition of "small" varies, it generally means fewer than 100 to 75 employees. Small businesses are normally privately owned corporations, partnerships, sole proprietorships, or limited liability companies.
Once you have decided what small business you wish to start, the next question you have to ask yourself is what kind of business structure is best suited to my operations. This is the most important choice any small business owner can make, as this decision will not only impact on how much taxes you pay, but it will also affect the amount of paperwork required, the personal liability faced and your ability to raise capital. Selecting a small business structure is the most important decision a business owner makes as it has wide implications.
Sole Proprietorship
Sole proprietorship is the most common forms of business organization not only in the US, but in the world. It is one of the quickest and easiest ways to set up a small business operation. Here there are no prerequisites required, nor are there any specific costs for starting this kind of a business. In a sole proprietorship you are the sole owner of your business. There are some minor formalities involved as with all business; however they also depend on the state in which you live in. These formalities include:
Obtaining a permit for your place of business
Securing a business license, and
Applying for a franchise or registration number for your operation
As it is a rather simple process, a sole proprietorship can be set up without the assistance of a lawyer or accountant. Here the business owner has complete control of the business but also faces unlimited liability for its debts.
Partnerships
There are two kinds of partnerships; general partnerships and limited partnerships.
General Partnership
In a general partnership, there are only a few formalities involved. However before entering into a partnership with anyone, it is prudent to consider all your options as no single person is in charge in this kind of a business setup. A general partnership involves two or more persons joining together in the operation and management of a business. A formal partnership agreement is recommended here as to avoid conflicts and draw boundaries such as who will be responsible for which tasks, who will manage what and so forth. In a general partnership, each partner is liable for the debts and profits of the business based on their percentage of ownership.
Limited Partnership
A limited partnership is similar to a general partnership except for one major difference. Here the limited partner is protected by law, as his/her legal liability is limited to the amount of capital invested. Limited partners only receive a share of the profit or loss based on the amount invested by them in the business.
Corporations
Unlike a partnership, a corporation is defined as a legal entity that exists, separate and apart from the individuals who created it and those who carry out its operations. There can be one or more than one incorporator, and a corporation can be formed simply by filing an application for a charter with the respective state. A complex form of business organization, a corporation is comprised of three groups of people: shareholders, directors and officers. A corporation can own assets, borrow money and perform business functions without directly involving the owner or owners of the corporation. Subject to more government regulations than proprietorships or partnerships, corporations are also subject to 'double taxation'; however they have the advantage of limited liability.
Many business owners choose to operate their corporations under subchapter S of the Internal Revenue Code. Known as an S corporation, this form of business permits a corporation to be taxed as a partnership or sole proprietorship, with the profits taxed at the individual shareholders rather than the corporation itself.
Limited Liability Company (LLC)
Limited Liability Companies are rapidly becoming a popular business structure. This is because a LLC combines certain corporate and partnership characteristics while at the same time still maintaining its status as a legal entity distinct from its owners. Similar to a corporation, but without the tax problems involved an LLC is taxed like a partnership.
As a separate entity, a LLC can acquire assets, incur liabilities and conduct business; however, it provides only limited liability for the owners. LLC owners risk only their money invested while their personal assets are not at risk. You can form an LLC for any business as long as it is not banking, insurance, or certain professional service operations.
