Last Updated on May 21, 2021 by MoneyVisual
There’s plenty to consider in the course of operating a business, and there are plenty of factors that can help your business become a success. But one of the very first you need to consider as you’re starting out is organizational structure.
This may not be the most interesting or exciting task you’ll face in the early days of your business, but it is a vital one because it determines how you’ll be treated financially by both the IRS and others who might demand money of you.
It’s likely that your business will have organizational quirks of its own, details that are specific to your needs. DC Insurers Affiliate Program, for example, uniquely helps independent insurance agents pool their assets and minimize their risk through membership without exerting direct control over their operation. And insurance companies are just the tip of the iceberg, as every type of company stands to benefit from a strong organization. Let’s explore the options they all face.
For many business owners, the most sensible course is to operate alone. The sole proprietorship is characterized, not only by the state of having a single owner in charge of the direction of the business but by the way it’s taxed — specifically, that it’s not.
The proprietor would receive income directly from the proceeds of the business and would then be responsible for paying income tax commensurate to the amount earned. In the case of a sole proprietorship, the business and the owner are one and the same for tax purposes.
A partnership is an unincorporated business owned and operated by two or more people. There are a few different types of partnership:
- General partnership. General partners share equally in every aspect of the business, from management responsibility to liability to profit.
- Limited partnership. If you join an organization as a limited partner, you benefit from a measure of protection. Your personal assets will be protected up to the amount of your stake in the business. The liability to general partners, meanwhile, will be greater.
- Limited liability partnership. In this model, every partner enjoys limited liability. This makes it an ideal choice for professionals who serve clients directly, such as those in the insurance business.
Limited Liability Company (LLC)
An LLC may be owned by numerous individuals, or even by other businesses. Its members are not personally liable for the actions of the company, a fact that protects their personal assets. In addition, company profits are not taxed on a company level, instead of passing directly to the owners, where they are taxed as federal income. An LLC retains direct control of its own management.
Now we begin to look at companies that are publicly traded on the stock market. The public holding of a company complicates the liberties held by its owners. An S corporation does enjoy limited liability – in general, it is the company itself, and not the owners as individuals, who are held liable for financial obligations.
You will, however, be required to pay Medicare and Social Security taxes on the wages you pay your employees, adding a new expense to the running of your company. You should also be aware of the restrictions placed on what kinds of shareholders you can have, restrictions that won’t exist for our final classification of the company.
C corporations face higher taxes, it’s true, but they also enjoy great flexibility. C corporations’ profits are taxed twice, once on the corporate level and again at the shareholder level. However, this might be worth it to you given that you’ll be able to take advantage of the opportunity for unlimited investors and lower health care costs.
Whatever type of business structure you choose, you’ll encounter specific benefits and challenges. Make sure you do your research and consult with the rest of your team, should you have one, before choosing the option that’s right for you.