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Forming Your Business: Choosing Your Business Structure

written by: Lucinda Watrous•edited by: Michele McDonough•updated: 5/13/2010

When you start a business, the first thing you need to do while planning is to choose your business structure. Each business structure has different benefits and drawbacks so it is important to learn what each of them has to offer before you start forming a LLC or an S corp.

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    Choosing Your Business Structure

    eyeglasses00004 Your business structure is a very important part of your business, as it determines the taxes you'll have to pay, what you are personally liable for, and whether or not you may have employees. Each business structure has its own set of rules and regulations governing the requirements for setup, how to set it up, and how to operate your business within the structure. Certain structures will work better for certain businesses, so the best way to determine which business structure you should use would be to consult a lawyer. The advice presented in this article should not be construed as legal advice and will not replace a legal consultation.

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    Why is Sole Proprietorship a Good Business Structure?

    A sole proprietorship is a good business structure because it is simple. It attaches a business to an individual, and therefore keeps documentation to a minimum. If the business owner uses his or her name in the business name, a "doing business as" or DBA form is not required to be on flie with the local government and state. If the business name does not involve the individuals name, this form is required. It is what gives a person legal right to conduct business under that name--through a bank account and so forth. Each state has different policies regarding how to appropriately file a DBA form.

    With a sole proprietorship, this is all it takes to get the business started. Most people begin with a sole proprietorship because of how easy it is to get started, though there are extra taxes involved. It doesn't cost a lot of money, and it gets them legally covered until the business grows to require something more. As a sole proprietorship, the individual's personal assets are liable should the business owe any debt or taxes.

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    Partnerships

    Partnerships are developed between two individuals. If a business formed by two (or more) people would be considered a sole proprietorship under one person, this is a partnership. An agreement must be devised between all of the parties starting the business that will set out who is responsible for what throughout the course of the business. Each party shares the responsibility for any debt the business owes, and his or her personal belongings will be liable in the repayment of said debt. One common type of business partnership is an LLP, or Limited Liability Partnership.

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    Forming a LLC

    Forming a LLC, or Limited Liability Company requires a bit more research and planning, along with financial investment. Rules and regulations will vary from state to state as will the necessary fees. This business structure allows for one or more people to form a business together without full personal liability for business debt. This does not remove all personal liability, but does more to establish the business as an entity separate from the individual.

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    Forming an S Corp

    Forming an S Corp requires the most financial investment and planning. Rules and regulations will vary from state to state. This business structure will completely separate individuals from the business entity. It is best to hire a lawyer to help establish the S corp rather than do it alone. Many new small businesses do not form as S corps initially because of the required investment.

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    Photo Credit: MorgueFile

Forming Your Business Structure

When starting a new business choosing your business structure is a very important function. This series at Bright Hub will help you learn why is a sole proprietorship a Good Business Structure and help you learn about forming an LLC or forming an S Corp. Read on to find out more about the basics of
  1. Forming Your Business: Choosing Your Business Structure
  2. Sole Proprietorships: The Simplest Business Structure
  3. Forming Your Business: Is a Business Partnership Right for You?
  4. Setting Up a Limited Liability Company
  5. What is an S Corp?