What is the Best Structure for my Business?
Starting and growing a business can be very stressful and time consuming, but the overall experience should be very rewarding. You can give your business the best start possible by choosing the most appropriate business structure for your business. What structure is best for you can be a complex question based upon several factors including tax consequences, liability and personal circumstances. Even if your business has been operational for some time, the structure may need to be altered due to changed circumstances. Some basic information about some common business structures is included below. At Avery Law Office, we will discuss the advantages and disadvantages of the various structures, help you determine the most appropriate structure and set up your business.
The sole proprietorship is the one of simplest forms of business organization. This structure occurs as a matter of law and you do not need to see a lawyer in order to create a sole proprietorship. When you start to carry on business on your own, you operate as a sole proprietor until some other form of business organization is adopted.
No separate identity — The business and the sole proprietor operating the business are considered one and the same in law. The sole proprietor is solely responsible for completing all of the business’ obligations.
Liability — If legal action is brought against the business, the sole proprietor’s personal assets may be liable to seizure. The sole proprietor is solely responsible for illegal acts committed in the course of business by both the sole proprietor and their employees.
Employment — The sole proprietor cannot be an employee of the business.
Income Tax — The income or loss of the business is included with the sole proprietor’s income and loss from other sources in determining the proprietor’s tax liability.
A general partnership requires two or more persons working together to carry on business with a view to profit. This structure occurs as a matter of law. You do not need to see a lawyer to create a partnership, but it recommended that you seek legal advice. Many important aspects of the relationship between partners is not dealt with in law and should be addressed in a partnership agreement. Examples of matters to be covered in a partnership agreement include the initial and ongoing capital contributions of partners, the manner in which partner distributions are to made and the admission of new partners.
No separate identity — The business is not a legal entity separate from the partners. Each partner is responsible for completing all of the business’ obligations, whether or not that partner was involved in the acceptance of the partnership.
Liability — If legal action is brought against the business, each partners’ personal assets may be liable to seizure. Each partner is responsible for illegal acts committed in the course of business by all partners and their employees. A creditor can seek payment from one partner to the exclusion of others.
Employment —A partner cannot be an employee of the business.
Income Tax — Generally, the income or loss of the business is allocated among the partners in accordance with the Partnership Act or, if applicable, the partnership agreement. The allocation is then included in each partner’s personal tax return.
In addition to general partnerships, limited partnerships and limited liability partnerships can also be created. These types of partnerships provide creative business structuring options. Both result in reduced partner liability and the former is a tool for investors who do not want to become involved in running the business. Con-tact us to find out more details about these forms of business organization and whether they may be appropriate for your business.
A corporation is a more complex form of business organization and can be expensive to set up and maintain. It must be created in order to come into existence. You should seek legal assistance when creating a corporation. The creation of a corporation requires the preparation of several documents, including an application, incorporation agreement, notice of articles and articles. The articles set the rules for the conduct of the corporation and its authorized share structure. These documents must be carefully drafted and made in accordance with law. The issues to be covered in these documents are too broad to be addressed in this brochure. Legal advice and guidance is recommended.
Once formed, a corporation has a legal identity separate from its shareholders and directors. A corporation, as a legal individual, can commence a law suit in its own name, purchase property and contract with its shareholders.
Separate Identity — A corporation has a separate legal identity and status from its shareholders and directors. It has the ability to do anything a natural person with full legal capacity can do.
Liability — Shareholders are not liable for the obligations of the corporation. Generally, the maximum loss that shareholders are required to contribute to the debt of the corporation equals the amount that they agreed to pay for their shares. The liability of shareholders is limited.
Employment — A shareholder can be an employee of a corporation.
Income Tax — As a separate legal person, a corporation must file its own income tax return. Some corporations receive preferential income tax treatment such as the small business deduction. This form of organization also allows for the division of business income. Shareholders pay tax when they receive a distribution from the corporation such as a dividend.
The information on this page is merely a guide and should not be relied upon for legal advice. It provides general information only. It is recommended that you see a lawyer about your particular legal situation.