Anne-Marie Saint-John, Alva, Long Island City, NY >
How to pick the best legal structure for your small business
The legal structure of a small business is the way the company is organized. It is very important to choose a suitable legal structure as it will affect all aspects of your business, from paying taxes to personal financial responsibility. The most common legal structures are sole proprietorships, partnerships, and corporations.
#1 – Sole Proprietorships
The most common and simple legal structure is an individual entrepreneur or a company with a single owner. The owner and the company are the same entity in the payment of taxes, so business earnings are personal earnings and will be taxed as personal income. The owner is financially responsible for his business, and personal property will be used to cover losses or debts incurred by the business.
#2 – Partnerships
Partnerships require two or more owners for the same company. This type of structure is otherwise the same as sole proprietorships: all partners are financially responsible for the company’s debts and the partners will bear the burden of taxes proportionally.
#3 – Corporations
The most complex and difficult business structure to obtain is the corporation. In a corporation, the owners are separated from the investors regarding taxes and salaries, and they are not considered fully responsible for the company’s debt.
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An S-Corporation is an option for a business owner who wants to create a corporation. You receive a salary, not part of the company’s earnings, as the sole employee of the company, and pay the corresponding taxes. The rest of the earnings are paid as a dividend, which pays less tax. Therefore, by separating the earnings between salary and dividend, the owner of the S-Corporation saves money in paying taxes.
As you’re deciding on the best structure for your company, remember that almost all companies start as sole proprietorships or partnerships. These two structures require little paperwork and are easy to register. They’re perfect for small businesses with little risk or losses. Once your business has larger amounts of debt or requires more capital, then you may consider going into a corporation to safeguard your personal assets.
