Guide to Business Entities

Starting a new business? Or do you think that your hobby has matured with time and you can now make money out of it? If you want to formalize a business, you need to first decide the type of business entity you want to form.

Cash is easy to handle. People pay you for what you have to offer, your expertise, support or a handiwork. You accept checks or PayPal payments that are linked to your bank account. But there are times when small businesses grow beyond a point where casual accounting does not work any longer. You need to convert it to a formal business entity to make it easier to handle business operations and file tax returns. Here is a brief guide to the type of business entities that you can consider.

Sole proprietorship is the simplest business entity as you do not need to register it and you can operate it under your name and social security number. Maintain a simple account of revenues and expenses. Save the receipts of expenses and bank statements and at the end of the year you can tabulate them to make an income and expenditure account. Registration with state or local tax office is required in case the product or service you are selling is taxable.

You may also consider forming a corporation. A corporation is an artificial person, a separate legal entity. There may be different forms (S or C Corporation) but the basic feature of all corporations is the same; limited liability. If the corporation fails, you lose your investment but you are not liable to its creditors. A corporation operates under the Articles of Association (or simply articles) that cover a medley of topics.

A limited liability company (LLC) combines the features of a proprietorship, partnership and a corporation. Although a business entity, it is basically not a corporation and shares only the feature of limited liability of owners. A LLC more flexible than a corporate entity and best suited for singly owned companies. The feature that it shares with partnerships and proprietorships is that the income of the company is treated as the income of owner/s. LLCs are registered entities.

Every business having more than one owner needs a buy-sell agreement, preferably at the time of formation of the business entity or as soon as possible. A buy-sell agreement is a legal agreement between co-owners for governing the situation in the event of the death of any one of the partners. In case of corporations a buy-sell agreement may not be necessary as it can be governed by a will.



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