What is the importance of business structure of your company?

The first step in starting a business is to determine the basic legal structure of the business, and to properly record the business name. This step is important when starting a business, since financial implications vary depending on which legal structure is selected. These range from responsibilities for tax fees to personal liability for business dealings as a sole proprietorship. The business name selected is the identifying and marketing component of the business. It should be given much thought and consideration. A professional tax consultant, accountant, and/or lawyer should always be consulted before determining the legal structure and business name.

How to decide on the right legal structure of your company

To decide on the right legal form for your business:

• Decide whether you are running this business by yourself or with others involved.

• If by yourself, you will be running a sole proprietorship.

• Is it more important to you to have a simple business and tax structure or less personal liability for debts and corporate judgments?

• If you want a simple business and tax structure with more than one person, choose a partnership.

• If you want to limit your personal liability for debts, choose to incorporate.

You can also consider the following

• The size and scope of business you hope to attain

• The level of control you wish to have

• The level of structure you are willing to deal with

• The business’ vulnerability to lawsuits

• Tax implications of the different ownership structures

• Expected profit (or loss) of the business

• Whether or not you need to re-invest earnings into the business

• Your need for access to cash out of the business for yourself

What is sole proprietorship?

A sole proprietorship exists when a single individual operates a business and owns all assets. A sole proprietor is personally liable for all debts, and business ownership is non-transferable. Under a sole proprietorship, the life of the business is limited to the life of the individual proprietor. The sole proprietorship makes no legal distinction between personal and business debts, and it does not require a separate income tax return. A sole proprietorship is often operated under the name of the owner.

What is partnership?

A general partnership exists when two or more individuals or businesses join to operate a business. Under a general partnership, a separate business entity exists, but creditors can still look to the partners’ personal assets for satisfaction of debts. General partners share equally in assets and liabilities. A general partnership requires an annual partnership income tax return (separate from the partners’ personal returns). A general partnership may be operated under the names of the owners, or a different name.

What is a limited company?

The limited liability company is designed to provide its owners with limited liability. A limited liability company must be registered.

What is a corporation?

A corporation is chartered by the state in which it is headquartered, is considered by law to be a unique entity, separate and apart from those who own it. A corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes .

Characteristics of a corporation

• Shareholders have limited liability for the corporation's debts or judgments against the corporations.

• Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)

• Corporations can raise additional funds through the sale of stock.

• A corporation may deduct the cost of benefits it provides to officers and employees.

Vinod Kuriakose

(The writer Vinod Kuriakose can be contacted at feedback2vinod@yahoo.co.uk)