Which Business Structure is Right For You?

Which Business Structure is Right For You?Before going ahead with that new business plan for your start-up, ensure you know all legalities involved, especially the different types of business structures available. The law surrounding each entity can differ from state to state (and country to country!) but generally the rules and regulations are quite similar. However, it is a good idea to seek legal advice beforehand so you are fully aware of the risks involved.  Below are some of the advantages and disadvantages of starting up a business as a corporation, limited liability company (LLC) or partnership.

Starting up as a… Corporation (equivalent to a limited company)

Setting up a corporation can be the preferred (and most beneficial) structure for employers looking to take on a large team of staff and have maximum legal protection. This type of business structure is owned by shareholders and has a board of directors.

Pros: A corporation is its own separate legal entity and is responsible for its own debt in insolvent situations, like administration or liquidation. This means, you, as a director, are protected if the corporation struggles financially.

It’s important to remember that the business owes money, not the director. If, however, directors have acted fraudulently, they will be exposed to the corporation’s liability.

Cons: There can be a lot of paperwork and filing of accounts when setting up a corporation, however this ensures everything is kept up to date and regulations as well as compliance are met. There are also higher tax fees which leads to more expensive accountancy fees.

Starting up as a… Limited Liability Company (LLC)

An LLC is a business structure that has more flexibility when it comes to taxes and regulations and is usually a good fit for small businesses. LLCs are owned by its members.

Pros: Like a corporation, you are protected against personal liability if the company enters insolvency. There is less paperwork to do as the structure is based around an informal agreement can be made when starting up and often adapted later on. An LLC can also choose how the business should be taxed

Cons: This type of entity is a fairly new structure and could be less favored than that of the ‘wise’ corporation structure. With perhaps an unfamiliar set up, investors may be more reluctant to lend.

Starting up as a… Partnership

As the name suggests, this business structure is set up with two or more partners and follows different common laws across the nation. However, there are some general rules that apply.

Pros: As structures get smaller in business size, so does the paperwork and filing of accounts. There are also fewer taxes to pay.

Cons: The big disadvantage of being in a partnership is you are personally liable for the partnership’s debt if the business falls in financial difficulty. Every partner is responsible for the entire debt, so if one partner is unable to afford the debt, creditors will look to the next partner and so on. Before going into this kind of business, drawing up a contract deeming who is liable for what is essential.

There is the option of setting up a Limited Liability Partnership (LLP). This type of formation can differ in law from state to state but is similar to a partnership. It does, however, offer more legal protection to partners if LLP becomes insolvent, hence limited liability. An LLP is essentially a cross between a partnership and a limited liability company.

Remember, you can change structures down the line if you want to. If you are unsure what the best plan of action is, be sure to get legal advice specific to your situation.

Keith Steven of KSA Group Ltd has been rescuing and turning around businesses for over 20 years and has worked with insolvency firms, turnaround funds and venture capital investors. He is also author of the site www.companyrescue.co.uk.  You can follow Keith on Google+.

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LLC vs. LLP vs. Inc: How to Decide What Business Formation is Best for Your Company

LLC vs. LLP vs. Inc: How to Decide What Business Formation is Best for Your CompanyHave you ever wondered what those letters and abbreviations you see behind business names stand for? They are business formations meaning they help define the nature, taxation, and overall financial structure of a company. If you are planning to open your own business, you will need to define it as an L.L.C., L.L.P, or Inc.  Today’s post will help to define the differences between the three main types of business formations.

L.L.C. – Limited Liability Company

An LLC is a company that blends parts of a partnership and corporation structure. LLCs combine the liability nature of a corporation and the taxation structure of a partnership company. LLCs have less corporate regulations like a Board of Directors or necessary shareholders meetings. LLCs also have fewer ownership restrictions and have more choice in deciding a tax structure. LLC and LLPs are considered “pass through” tax entities, meaning that taxation is levied through the income tax of the owners as their profits are considered the income of the individuals. LLCs, like corporations, allow the benefit of separating the proprietor’s personal and business assets. This means that any personal assets not invested in the LLC will not be at risk of loss in case of bankruptcy.

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Business Basics: Limited Liability Partnership

A Limited Liability Partnership is a very interesting type of business structure. Limited Liability Companies already combine the ease of running a partnership with the protection of a corporation, and the IRS originally ruled that LLCs would be taxed as partnerships. So what is the difference between a Limited Liability Partnership and a Limited Liability Company? And which one would be the best structure for your company?Limited Liability Partnership

What is a Limited Liability Partnership (LLP)?

We’ll answer the easiest question first. An LLP is very similar to an LLC – both protect the company’s owners from lawsuits and debtors, and both have a pass-through tax structure, meaning anything the company earns passes through it, directly to the owners, without being subject to any corporate income tax. However, a Limited Liability Partnership offers an extra bit of liability protection to each partner. So, just like in a Professional Corporation, the other partners in an LLP will not necessarily be liable for the consequences stemming from another partner’s actions.

Do all states recognize LLPs?

Yes, though the laws recognizing LLPs vary from state to state. The majority of the states have adopted the Revised Uniform Partnership Act, which includes a provision for LLPs stating ‘An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership.’ In layman’s terms, that essentially means that the company, and not the individual partners, is responsible for any obligations stemming from contracts or torts. The states that haven’t adopted the RUPA instead opted for their own laws to recognize LLPs, but all follow the same basic pattern.

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Guest Post: Three Company Entities Explained

The type of business entity that you choose can impact the taxes you are liable to pay and also your legal protection. This makes it especially important to ensure that the entity you choose is right for your business.

Here we give a balanced snapshot summary of three of the key business entities – Limited Liability Company, sole proprietorship and general partnerships – to help you consider which could be most suitable for your business needs. Continue reading

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