Young entrepreneurs need standard information about business structures to secure their assets legally. Essentially, your business structure largely influences the entirety of your enterprise. From the daily running/ organization to taxation, liability and risk factors, etc. As a result, young entrepreneurs need to choose business structures that yield legal benefits while affording reasonable financial protection.
This blog post and guide will discuss in detail everything that young entrepreneurs need to choose the right business structures. Keep reading to learn more!
Business structures: What young entrepreneurs need to know
As young entrepreneurs, every business you establish is an entity, provided there is a structure. Business structures largely influence your tax returns and liability, which is why they are very important.
Business structures refer to the legal framework of a company and how it impacts or influences the day-to-day running of the business like taxation, profitability, etc., especially in line with government policies.
Types of business structures for young entrepreneurs
Essentially, the easiest way around choosing the best business structure that benefits your business financially and legally is to understand the different types of business structures. Also, you have to consider the type of business you intend to run and your desires for your company as a whole. Here are the four types of business structures and their features to help young entrepreneurs choose what best serves their entrepreneurial interests.
Sole proprietorship for young entrepreneurs
A sole proprietorship is the simplest business structure for young entrepreneurs as it involves just the business owner. It doesn’t require any formal business registration. Although it is pretty inexpensive to run, it can also be risky for young entrepreneurs. The reason is that you cannot separate your finances from that of the business. As a result, your business liability intertwines with your income tax. The 1099 forms with which young entrepreneurs operate also include their tax liability, personal income other government dues.
A sole proprietorship is for young entrepreneurs who want to create and run small businesses. Unfortunately, it is difficult to secure funding through loans for a sole proprietorship. So it is a better option for less risky businesses. It is also important to note that running a sole proprietorship does not prevent you from having workers for which you have to generate W-2 forms, after each paycheck.
Partnership for young entrepreneurs
A partnership involves the merging of two or more young entrepreneurs to create a business where they both share the input and ownership of the business. It is also fairly simple to create, and the owners share the responsibilities including profits and losses. Also, a partnership is similar to a sole proprietorship in the sense that both the business owners and the business are one entity before the law. Filing taxes is pretty peculiar here where each partner reports information in form 1065 with their tax returns. In addition, the partners pay a self-employment tax subject to their share of the company’s profit. Partnerships are pretty advantageous because they require minimal protocols for registration.
Also, the partners are not obligated to have the same level of requirements as limited liability companies. Partners in a partnership benefit from a fair taxation process where each partner reports their tax liability in concurrence with their profit or loss from the business. Unfortunately, the partners in a partnership are both liable for obligations of the business to the extent that if there is a problem, it could cost them their assets. Furthermore, because a partnership involves two or more individuals, a disagreement can limit the growth and success of the business.
Corporation for young entrepreneurs
Corporations are more complex business structures compared to sole proprietorship and partnership. One fundamental characteristic is that the corporation is entirely separate from the business owners. As a result, a corporation is more expensive to build, incurs more tax obligations. Fortunately, the debt that accrues to a corporation is separate from the owners to generate some financial protection. This way, the personal assets of the business owner are not at risk. Also, the registration of corporations has strict rules and must comply with state laws. Also, they must pay both federal and state taxes.
Two types of corporations exist C-corporation and S-corporation.
While the C-corporation is separate from its owners, the S-corporation requires about 100 shareholders and operates similarly to a partnership.
The biggest advantage of a corporation is the ease with which young professionals who own them can raise huge capital through public stock selling. There is sufficient protection of personal assets for the owners. Regardless, it is exceedingly difficult to set up and requires rigorous processes to establish.
Limited Liability Company for young entrepreneurs
A limited liability company combines the effect of corporations and partnerships in one, especially, towards the personal assets of the business owner. The reason is that both business and personal assets are separate. Essentially, your income does not experience double taxation, making limited liability companies an excellent structure for young entrepreneurs who want to engage in businesses that involve considerable risk. However, it is more complicated to set up and requires rigorous processes. In addition, it differs from one state to the other.
The business structures that young entrepreneurs choose are critical to a successful business and entrepreneurship journey. As a result, adequate information about the various business structures is essential for making the right choice. While other business structures seem a bit complex to establish, you can always get in touch with an attorney to help you understand the legal implications of the business structure you choose. Moreover, you want to as much as possible avoid legal and tax issues while ensuring that your business and personal assets are adequately protected. Hopefully, this guide helps put things in perspective for you.
FAQS: How many different business structures are there in the united states?
How many different business structures are there in the united states?
In the United States, there are fundamentally four primary types of business structures. They include sole proprietorship, partnership, corporation, and limited liability companies. The four business structures have different perspectives for tax, income, and liability. Including their legal implications for the young entrepreneurs who own them.
How do I choose a business structure?
The essential factor to consider before choosing a business structure is how well your business complies with state, federal, and local tax obligations. The reason is that your business must maintain clean legal background to thrive. Essentially, the specific business structure you choose will largely affect how liable you are and what taxes you have to pay.
What business structure is best for a small business?
If you run a small business, then the best business structure for you is the sole proprietorship. Essentially, it is the easiest business structure to form and has the least government influence and regulation. Alternatively, you can choose to form a partnership for your small business provided you have found the relevant people with whom to merge. Moreover, just like with sole proprietorship, you do not require much to form a partnership.