Business Basics

About business ownership.
Choosing the right type of business structure for your needs is essential to maintaining a high business credit score. There are several different options to choose from, and each has its own pros and cons when it comes to your personal finances. It is wise to consult an accountant for advice on which is the best option for your small business.

Sole proprietorship's are the easiest and cheapest business type to set up, maintain and dissolve. There is only one owner of the company, and that person assumes all legal and financial responsibility for the company. If the company defaults on loans or is sued, the owner's personal assets may be at risk. The business credit of this type of company will be determined by the credit of the individual owner. All profits are considered income to the owner for taxation purposes.

Partnerships are similar to sole proprietorship's in that all legal and financial responsibilities fall on the owners. For this type of business, there is simply more than one owner. When setting up this type of business, a contract should be drawn up to determine what contributions each partner is to make, how decisions will be made in cases of disagreement, how profits are to be distributed and how a business dissolution will be handled. The credit for this type of company will be determined by the credit of all partners. Each partner is taxed individually for their share of the profits.

Corporations are formed because the owners choose to have the business be considered a separate entity by state and federal government. Owners of a corporation are considered shareholders, and distributed profits are considered dividends. The owners of a corporation are not legally responsible for debts and obligations of the company, but are held responsible for their own personal actions. Because a corporation is considered a separate entity, it has its own credit rating, and will generally not affect the credit of the shareholders. The corporation is responsible for paying its own taxes, and the dividends to shareholders are also taxed individually, resulting in double taxation. Regular corporations are also known as C-corporations.

S-corporations are a different type of corporation, and there are several restrictions on companies that wish to be designated as such. S-corps enjoy the same benefits as C-corps in terms of the limited liability of the shareholders, and is a separate entity for credit purposes. This type of company passes profits to the shareholders as distributions, or wages, as if the shareholders work for the company. Doing this avoids the double taxation that C-corps experience.

The last common business structure is the Limited Liability Corporation (LLC), which has the limited liability aspects of a corporation, but is treated as a sole proprietorship or partnership in terms of how the business is run and profits distributed. There are restrictions on the types of businesses that can form an (LLC), in that they can only have 2 of the 4 aspects that define a corporation. An (LLC) is not a taxable designation, and taxes must be filed as sole proprietorship/partnership or as a corporation.

Because your personal financial situation can be affected by owning a business, it is important to choose the right company structure to maximize potential gain while minimizing potential losses. The main issues to consider are liability and taxation implications of each option.