Starting Your Business/Keeping Tax Records
Selecting a Business Structure (SBA)
Types of Business Organizations
When organizing a new business, one
of the most important decisions to be made is choosing the
structure of a business. Factors influencing your decision
about your business organization include:
- Legal restrictions
- Liabilities assumed
- Type of business operation
- Earnings distribution
- Capital needs
- Number of employees
- Tax advantages or disadvantages
- Length of business operation
The advantages and disadvantages of
sole proprietorship, partnership and corporation are listed
below.
Sole Proprietorship
This is the easiest and least costly
way of starting a business. A sole proprietorship can be
formed by finding a location and opening the door for business.
There are likely to be fees to obtain business name registration,
a fictitious name certificate and other necessary licenses.
Attorney's fees for starting the business will be less than
the other business forms because less preparation of documents
is required and the owner has absolute authority over all
business decisions.
Partnership
There are several types of partnerships.
The two most common types are general and limited partnerships.
A general partnership can be formed simply by an oral agreement
between two or more persons, but a legal partnership agreement
drawn up by an attorney is highly recommended. Legal fees
for drawing up a partnership agreement are higher than those
for a sole proprietorship, but may be lower than incorporating.
A partnership agreement could be helpful in solving any
disputes. However, partners are responsible for the other
partner's business actions, as well as their own. A Partnership
Agreement should include the following:
- Type of business.
- Amount of equity invested by each
partner.
- Division of profit or loss.
- Partners compensation.
- Distribution of assets on dissolution.
- Duration of partnership.
- Provisions for changes or dissolving
the partnership.
- Dispute settlement clause.
- Restrictions of authority and expenditures.
- Settlement in case of death or incapacitation.
Corporation
A business may incorporate without an
attorney, but legal advice is highly recommended. The corporate
structure is usually the most complex and more costly to
organize than the other two business formations. Control
depends on stock ownership. Persons with the largest stock
ownership, not the total number of shareholders, control
the corporation. With control of stock shares or 51 percent
of stock, a person or group is able to make policy decisions.
Control is exercised through regular board of directors'
meetings and annual stockholders' meetings. Records must
be kept to document decisions made by the board of directors.
Small, closely held corporations can operate more informally,
but recordkeeping cannot be eliminated entirely. Officers
of a corporation can be liable to stockholders for improper
actions. Liability is generally limited to stock ownership,
except where fraud is involved. You may want to incorporate
as a "C" or "S" corporation.
Note: For Federal Tax Information, see Publication
583, Starting a Business and Keeping Records:
Sole
Proprietorships
Partnerships
Corporations
S corporations
Important References
Publication
583 Starting a Business
and Keeping Records
Web Link
www.sba.gov/starting/indexstartup.htm