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How to choose a small business structure

One of the most important choice you make while starting your business is the type of legal structure you select for your company. This decision has a direct bearing on not only your financial operations of your firms such as how much you pay in taxes but also determines the personal liability you face, your ability to raise money and the amount of paperwork for your business.

Hence it becomes quintessential to get this decision right before starting your business. This decision involves proper legal and financial guidance and should not be taken alone. It’s always advisable to consult the experts as Mr. Kalish, an entrepreneur himself suggests, "What structure you choose makes the most sense. He further says that it's important for business owners to seek expert advice from business professionals when considering the pros and cons of various business entities.

Also the type of business entity you choose would depend on three primary factors: liability, taxation and record-keeping. So, of the different types of business entities that exist, a few major ones which bring out the differences in these aspects are as follows:

1. Sole proprietorship
This is the most common form of business organization. It's easy to form and offers complete managerial control and powers to the owner of the business. However, the owner is also personally liable for all financial obligations of the business.

2. Partnership
Partnership involves two or more people who agree to share the profits or losses of a business. A primary advantage is that the partnership does not bear the tax burden of profits or the benefit of losses-profits or losses are "passed through" to partners to report on their individual income tax returns. As against this advantage, a primary disadvantage is the liability aspect---- each partner is personally liable for the financial obligations of the business.

3. Corporation
It is a legal entity that is created to conduct business. The corporation becomes an entity-separate from those who founded it-that handles the responsibilities of the organization. Like a person, the corporation can be taxed and can be held legally liable for its actions. The corporation can also make a profit. The key benefit of corporate status is the avoidance of personal liability. The primary disadvantage is the cost to form a corporation and the extensive record-keeping that's required. allowing income or losses to be passed through on individual tax returns, similar to a partnership.

4. Limited liability company (LLC)
This is a hybrid form of partnership that is gaining in popularity because it allows owners to take advantage of the benefits of both the corporation and partnership forms of business. As the name suggests, this form of a structure has certain characteristic of a corporation and some characteristics of a partnership. The advantages of this business format are that profits and losses can be passed through to owners without taxation of the business itself while owners are shielded from personal liability.

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