Legalform

How does the structure of my business look like? The legal form of a business: this is one of the most important decisions you will have to take during your setup, because it will have legal and tax implications on your business. The administrative work, liabilities and the possibility to make profits depends on which structure you choose, so take time to understand all to possible structures and decide which one is the best for you. If possible get advice from an expert e.g. a tax consultant, Lawyer etc.They will be able to tell you the advantages and disadvantages of each legal form and also if there is a possibility reverse your decision in the near feature or not. These are some of the few questions most self-employed are confronted with, at the planning stage of their business.

Sole Proprietorship: Most self employed decide for this structure type. It is appropriate for lawyers, freelancer, handcraft enterprises etc. when only one person is involved. Some of the advantages of this structure type is its unbureaucratic form, low tax rates. There is no fixed amount of capital required to start. You are responsible for making your own business decisions and the profits belongs to you alone. It is actually very flexible. Some disadvantages are, the owner is liable (also with his private property) for the debts and obligations of his business. Mostly the start capital is inadequate, the possibility to raise extra funds is very difficult, investors are not willing to invest and banks are not ready to grant loans. All these factors sometimes slowdown business growth.

Partnership: Just like the sole proprietorship, this form of business is very flexible, easy to establish and requires no fixed amount of capital. It involves two or more partners who share ownership. Each partner is involved in management decisions, finances, asset, business operations as well as profits and losses of the business. However to avoid future misunderstanding, it is necessary to clear up uncertainties before establishing the business.  A legal agreement is usually recommended. This document shows how business decisions will be made, how the business will be financed, which partner will be responsible for which task, how profits will be divided, what happens if the partnership is dissolved etc. Profits, liabilities and duties could be assigned equally or unequally to members depending on the terms of agreement.

Advantages: there is a possibility to raise more funds, since there is more than one partner. The partnership can boost of a wider range of knowledge and skills. It sometimes cost-effective, since each partner specializes in certain aspect of the business.

Disadvantages: partners are liable for their own actions, for the business debts as well as for the actions of other partners. There could be disagreements between partners. Death could end up the withdrawal of a partner. Since ownership is share, profits must also be shared among partners.

Limited Liability Company: this form of business combines the features of a sole-proprietorship, a partnership and a corporation. However it provides limited liability to its members, and its mostly appropriate for companies with single owner. Owners are usually referred to as members. LLC is not taxed as a separate entity but all profits and losses are "passed through" the business to each member, who then declare this on their income tax.

Forming a limited liability company is not so easy compared to sole-proprietorship but the procedures are lesser than a corporation. There are some rules to comply with when forming an LLC: the name of the business must not have been used by another limited liability company, you will need to file an article of Organization with the state. Just like the partnership it is highly recommended to create an operating agreement which defines companies ownership and ownership changes, responsibilities and profit sharing.There are different rules governing the formation of LLC, check your state for more information

Advantages:There is flexibility in the management structure and in profit sharing, members are not personally held liable for debts, there are less formalities and paperwork, the business is regarded more legitimate as a sole proprietorship or partnership.

Disadvantages: The business ends when a member leaves, dies or if the company undergoes bankrupt, members must pay self employment tax.

Cooperative: this form is established not for the purpose of earning profits for investors but that its shareholders and members may purchase products or use services of the organization. Cooperative organizations are owned and run by its members i.e. those who benefit from its services. They all have equal voting rights regardless of their level of involvement or investment and are obligated to help run the business.  Such form of business is mostly found in healthcare industries, credit unions, staff welfare associations etc.

To form a cooperative business, it is necessary to legitimize your business by filing articles of incorporation. This document provides basic outline of your cooperation, like its purpose, how it will be financed, names of members, location, address and signatures of incorporators.

Prepare By-laws, this explains how the business will be operated and covers topics like the requirements to become a member, members rights and responsibilities. Members loans and shared capitals, election of delegates and board of directors etc.

Advantages: there is less taxation, members are not held responsible for the debt of the company expect if its caused by themselves through e.g. fraud etc. Members can join and leave without causing a dissolution.

Disadvantages: If members do not actively participate in the business activities, members may be lost and the business may not operate optimally.

Corporation: is an independent legal entity which is able to operate a business, buy, own, rent and sell assets. Capital is usually raised by selling shares. It can hold mortgages, have debt, file income tax returns and enter into contracts. This type of business is appropriate for big companies who needs huge amounts of finances. It is accompanied by complex tax and legal requirements.

To form corporation it is required to register the company and file articles of incorporation with the government outlining the nature of the corporation, names and addresses of the board of directors and prepare bylaws to regulate the internal functions of the corporation.

Advantages: share holders are liable only for their investment in shares, more capital could be generated through the sales shares.

Disadvantages: Its structure is more complex, hence requires more time and money.Income may be subjected to double taxation

S Corporation: Federal taxes are not paid in this form of business, instead the business income and losses are divided among its shareholders, who then reports this annually on their individual income taxation. To qualify as an S corporation, you have more than 100 shareholders, have one class stock, be a limited liability company with the ability to be taxed as a corporation or a domestic corporation etc. Some of the advantages of S Corp is tax savings, some expenses incurred by members can be written off as business expenses.