There are several different ways that you can structure your business and there are certain tax advantages as well as some disadvantages to every business structure. If you are not familiar with this field the best thing to do would be to speak to an accountant regarding which type of business structure is right for you. Once you determine how you want to structure your business, you can seek out an attorney that practices corporate law and can explain to you the legal repercussions of different business structures.
USA and Canada Business Structures
There are several different business structures available in the United States and Canada. The decision on how to structure your business should be based on advice from your accountant with regard to taxes as well as legal advice. The following are the business structures currently available:
- Sole Proprietorship: Often called a “mom and pop store”. This is where the business has no formal structure and can be operated by one person or a couple. The assets are held in joint tenancy with rights of survivorship. Many small, family businesses are structured this way.
- Joint Venture: Often used for investing where a group of individuals get together for a single venture and operate as partners.
- Limited Partnership: When two or more people operate a business together under their own names. Many law firms are structured in this manner. The limited partnership is not a separate entity, but liability for one partner does not fall on the other partners in the firm.
- Limited Liability Company: Used in the United States and relatively new. A separate entity that combines aspects of both a limited partnership and a corporation.
- Corporation: A separate entity that may or may not issue stocks and puts a limit on the liability of any of the officers of the corporation. Corporations in the United
- States are grouped into two different types and cannot be owned, either partially or wholly, by non-US citizens.
A “C” Corporation is used for larger corporations that will issue more than 100 shares of stock.
A “S” Corporation is used for smaller corporations that are limited to 100 shares of stock or less.
(a) Sole Proprietorship
This is the easiest way to start a business. When you own a sole proprietorship, you are personally responsible for all that goes on in the company. You do not need to register a sole proprietorship with the state and can just start it up. You can file a Schedule C on your income tax when you have a sole proprietorship.
Advantages
- No registration fee.
- Easy to start up and maintain on your own.
- You have total control over the business decisions.
- All of the assets of the business, including profits, go to you.
- Tax benefits are available and you can take a loss on the business and write it off of your taxes for 3 years.
- You have no legislation to follow and no paperwork that has to be filed.
Disadvantages
- You cannot sell stock to gain capital or seek investors.
- You are personally responsible for any lawsuits against your company.
- You have to be on the premises all of the time to prevent theft from employees.
- You are tied to your business all of the time and will have limited time off.
- No one to run the business in case you get sick.
- You are personally responsible for all debts incurred by the business.
- Huge tax disadvantages if you have high profits.
(b) Joint Venture
A joint venture is formed by people, partnerships and companies for the sole purpose of one venture, usually an investment. A joint venture is an agreement drawn up by an attorney in which everyone is responsible for the venture in proportions that are agreed upon in he beginning of the venture. You can enter into a joint venture under a corporate name or in your own name.
Advantages
- Easy to start – you just need to enter into a contract.
- Having partners enables you to share the expenses and the risks.
- More knowledge from other partners in the joint venture.
- Ability to take time off.
- Easy to get out of if you want to sell your share of the venture.
Disadvantages
- Liability for the venture can fall upon you personally if you enter into the agreement with your own name.
- Personality problems may arise if someone feels they are doing more than their share of work.
- No tax advantages
- Problems may arise if one person leaves and sells their share to another investor.
(c) Limited Partnership
A limited partnership is comprised of two or more individuals operating in the same business. It is not a separate entity, but the partners are limited as to the risk that they take on by the other partners. Limited partnerships allow more than one person to work together and share the wealth of the partnership, as well as the burdens.
Advantages
- Easy to start and requires a partnership agreement.
- Tax advantages for family members in a partnership.
- More money to go into the business.
- Ability to attract more clients or customers.
- More knowledge in the firm.
- You can take time off.
- It is relatively easy to dissolve your share of the partnership.
- You and your partners can alternate on vacations and other time off.
- If you are sick, your partners can manage the business.
- Your family will profit from your share of the partnership if something happens to you as limited partnerships are held as tenants in common.
- Shared liability.
Disadvantages
- Potential for disputes over development of business, direction it is going, profit sharing and just about anything else as well as the potential for disagreements.
- You will are limited with regard to your responsibility in the partnership, but you are liable for some actions that are made on behalf of the partnership.
- You can lose personal assets if the partnership is sued or suffers damages.
- Some tax disadvantages.
- Problems arise when one partner wants out.
(d) Limited Liability Company (United States Only)
In the United States, Limited Liability Companies were established in 1983 as a cross between corporations and limited partnerships. An LLC is a separate entity, like a corporation, but has the advantages of a limited partnership as anyone can become a partner in the company. In order to start an LLC, you have to file articles with the Secretary of State in any state in which you do business to get it started but it does not entail the maintenance of a corporation.
Advantages
- Individuals in the LLC are not personally liable for the debts incurred by the business, unless they sign a personal guarantee or they create fraud or reckless debt.
- Individuals who are officers in the LLC are not personally responsible for lawsuits against the LLC.
- You can have owners from other countries in the LLC.
- The LLC can open bank accounts, own property, take out insurance and get loans as it is its own entity.
- No keeping of minutes or quarterly meetings are needed.
Disadvantages
- Largest of all filing fees to start up.
- You cannot sell stock.
- You have to follow regulations regarding taxes similar to those of a corporation.
(e) Corporation
A corporation can be either an S corporation, used for small business that do issue more than 100 shares of stock and a C corporation that can even go public to attract investors by issuing stock. Many businesses incorporate for the tax advantages, the security and the ability to attract investors. An accountant will usually advise a business if they should set up as an LLC or a corporation. An attorney can draw up the Articles of Incorporation or other documents needed to get started. Just like an LLC, you have to file Articles of Incorporation with the Secretary of State in any state where you do business. Each state has a different filing fee, although it is less than filing an LLC. You also have to file an annual report each year and pay a fee to maintain the corporation.
Advantages
- Officers or directors of the corporation are not personally liable for debts incurred by the business unless they are fraudulent, reckless or backed by a personal guarantee.
- Individuals who are officers or directors in the corporation are not personally responsible for lawsuits brought against the corporation.
- You can sell stock to get capital for the business to investors.
- The corporation can open bank accounts, own property, take out insurance and get loans as it is its own entity.
- Tax advantages to owning a corporation.
Disadvantages
- A lot of paperwork to maintain the corporation with scheduled quarterly meetings of both officers and shareholders, who may or may not be the same people.
- In the United States, no stock to foreign investors and foreign investors cannot be directors or officers in the corporation.
- Many rules for establishing and usually an attorney is needed to start up and maintain the entity.
- Strict government regulations.
UK and Australia Business Structures
In the UK and Australia, companies are structured basically the same as those in the United States and Canada, but are called different names. There are also fewer choices. The Joint Venture only exists in Canada and the United States and the LLC only in the United States.
Sole proprietorships in the UK and Australia are called sole traders. They operate under similar laws as their counterparts in the US and Canada and have basically the same advantages and disadvantages.
Limited Partnerships are referred to simply as Partnerships in the UK and Australia and, again, operate under the same laws as their counterparts in the US and Canada. Corporations are called Companies in the UK and Australia and operate under the same type of stringent guidelines as those in the US and Canada.
Australia enables those to establish business as a trust, something that is not allowed the other countries. While a trust can own land and you can put your assets into a trust for estate planning, a trust itself cannot establish a business. The trust in Australia operates similar to a sole proprietorship with the benefits of a company in that the trust owns the company and the trader is a beneficiary of the trust.
For the most part, business structure is very much the same in the United States, Australia, the United Kingdom and Canada.
