There are plenty of different forms of business organizations available. This more often than not refers to the legal arrangements of the business. The form you opt for your business is the form that best suits your objectives. There are wide array of legal and tax implications of each. The three main forms are sole proprietor, partnership and corporation.
A sole proprietor can be defined as an individual who is in business for himself. He or she supplies all of the skill, knowledge and capital for the business. He or she performs all of the business functions associated with the business. He or she receives all of the profit that is taxed at individual income tax rates. He or she also bears all of the liability. There is no similarity between his or her personal assets and the assets of the business.
On the other hand a partnership is when two people go into business together. In partnership they supply all of the capital and skill and knowledge. They implement all of the business functions. In addition they share the profits and liabilities. Remember that the profits of the partnership are taxed at individual income tax rates. As is the case with the sole proprietorship, there is no distinction between the assets of the business and the assets of its partners. This clearly pinpoints that each partner is responsible for the business debts of the other partner.
A corporation is more or less owned by its stockholders. In other word, it is a legal entity in its own and has all of the rights and responsibilities of a legal person. The corporation is answerable for its own debts. Furthermore the assets of corporation are subject to the claims of its creditors; the assets of the stockholder or owners are not. This is one of the big benefits of the corporate form of business. Thats why the owners are not legally liable for the liabilities of the corporation although they can be sued or held responsibilities for some criminal activities. According to experts the corporation pays its own taxes, taxed at the corporate tax rate. Though, the stockholders get a share of the corporations profits in the form of dividends. It is worth pointing that dividends are taxed at the individuals tax rate. Dividends are a part and parcel of corporate profits that are taxed twice, once at the corporate tax rate and again at the individual tax rate.
When deciding which form of business organization is ideal, you may want to seek advice from your lawyer and accountant. There are benefits and drawbacks to each form of business and which one is best for your particular business depends on legal and tax considerations.
According to the US Bureau of Census, 550,000 new businesses were formed in the year of 2005. Though it is not known how many were incorporated. Statistic wise there were approximately 22.9 million businesses in the US. These are more or less small businesses that form the backbone of the American economy. Small businesses represent staggering 99.7% of all employers and create more than 50% of non-farm private gross domestic product.
Majority of businesses start out small. In the initial, data reveals that 82% of the small businesses are financed by personal loans or savings and loans from friends and relatives. Therefore, when these firms grow large, it is important that easier access to finance from banks and the public is available. Moreover, the owners liabilities have to be minimized to reduce personal and business risk.
A checklist for starting a business runs like this: first and foremost select a business structure, choose a tax year, and select accounting method and payment of business taxes. The requirement for incorporation arises if the business structure chosen is either a LLC or corporation. Either of these needs mandatory filing with state authorities. In case if it is sole proprietorship and partnership, registration is not needed, and business routines may begin immediately. On the other side of the coin, in the cases of LLC and corporation, a lot of legal counsel, understanding the filing procedure, tax compliances, formation of business structure as per the type of corporation and the role of management and members are required.
The actual filing routine is filling out proper forms and handing them over to state authorities where incorporation is done. Filing the papers can be implemented by hiring the services of an incorporating agency. These agencies are the one that file the papers in all the states required and provide some value added services including information of fees and duration calendars that vary from state to state. For example states like Nevada and Delaware are corporate friendly; therefore, most firms incorporate in either of these states.
Incorporating your small business may be the most pivotal thing you ever do. There are plenty of reasons why you should consider incorporating.
Firstly, by incorporating your business you minimize your overall liability. With a corporation you can enter into the fray of lease agreements, borrow money and purchase goods and services on credit. When you register on the dotted line, the corporation, not you personally, are liable and accountable for any agreements entered into under the corporate name.
In addition, in our litigious society you are shielded from personal loss should the business be sued. Thats why it is foolish to run the risk of being a target with your deep pockets when you can transfer wealth to the corporation and protect your family from large losses due to a judgment or twelve jurors with a chip on their shoulders
Of course, one of the most crucial reasons for incorporating is to take benefit of tax deductions not available to sole proprietors and individual taxpayers. With the help of incorporating, you can write off travel expenses, start up and operational costs of doing business, certain types of salaries and employee compensation, insurance costs, and even vehicle expenses, leases and mileage.
Talking about taxes, if youve ever been audited then you knows what a nightmare it is. Remember that incorporations are audited far less than sole proprietors, particularly if you run your business out of your home.
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