There are four different core legal structures a contractor may select. Each has its own restrictions, advantages and distinct issues requiring knowledge to ensure the best selection. This article will cover the four different structures and the variables that give it advantages over the others. Each structure works well given certain underlying conditions. For a contractor, selecting the right structure will assist in maximizing profit and smooth operations.
Of the four business entity types, the sole proprietorship is by far the most flexible and easiest to manage. The sole proprietorship has very few drawbacks. In the world of business, the key is to maximize profit with the least amount of risk. Each of these two elements is addressed as it relates to 1) decision making, 2) paperwork, 3) taxation and 4) civil matters.
Many small business owners are actively involved in the community and thus donate time and money to their favorite cause. In almost every case the owner believes the donation is a business deduction. It is NOT a business deduction for tax purposes except under the C-Corporation status; however, the business is still writing the check. Therefore the bookkeeper must still track the deduction and identify the donation properly so the gift is deductible on the owner’s personal tax return.
When an entrepreneur starts out on his/her long journey of building a legacy with his business; he/she almost immediately focuses on the legal status of his business. Thoughts include: ‘Should I become a limited liability company or an S-Corporation?’; ‘What if I take on partners?’; ‘How do I get more capital without giving up control?’
The common law definition of a business is an investment of capital or property by individuals which creates the means to carry on towards the goal of generating a profit. Every state recognizes different legal formats to conduct business. The simplest and most common is the sole proprietorship. Other forms include partnerships, limited liability company and of course corporation status (S-Corporation is a federal tax option of a corporation). However, two states actually recognize another legal format – business trusts.
Simply put, this is a tax on your net earnings from your small business operation. If you are unincorporated, you have to pay this tax. This includes those in partnership arrangements, and in any form of Limited Liability Company status. Why don’t corporations pay the tax? Actually they do, it’s just called a different name.
When an entrepreneur starts a new business operation, one of the first questions (s)he deals with is the form of business existence. There are a multitude of entities that the law allows. This article describes the four main types and the decision making model that an entrepreneur should follow in determining the best for the business.