One of the most important decisions you will make when starting a business is what type of business entity to form. This decision will have a lasting impact on your business and its operations. The type of business entity you choose will determine the legal and tax liability of your business, as well as the level of personal liability for your actions.
This blog post will discuss the importance of business formation and outline the different types of entities available to entrepreneurs. We will also provide tips for choosing the right entity type for your business.
What’s A Business Formation?
A new business formation is an act of creating a new legal entity for your business. This can be done by filing the appropriate paperwork with your state government.
There are many reasons you would want to form a new business entity. For one, it can help you protect your assets from liability. If your business is sued, the court can only go after the business’s assets, not your personal assets.
Another reason to form a business entity is to get certain tax benefits. For example, some businesses can save on taxes by forming an LLC or S-Corp. If you need help setting up your business formation, get in touch with professional accounting services to get started.
How Business Formation Works
Forming a business requires a lot of planning, making key financial decisions, and completing a series of legal activities. Fulfilling the legal requirements, the required documentation, and strategic development can be overwhelming. You need to have in-depth knowledge of how to start a business or seek the help of management advisory firms that specialize in the practice. However, with a little effort and your determination to turn your idea into a business, then it is workable.
If you want to start a business, you most likely already know the products or services you want to sell. It is also likely that you know something about the market you want to enter. You would need to conduct some market research for the business you have in mind, create a business plan, fund your business, and choose an ideal location to set up. With that in mind, you can embark on the following steps to ensure that your venture is a success.
• Choose your business name
• Come up with a business structure
• Register the business
• Get state tax and federal IDs
• Apply for the permits and licenses
• Open a bank account for your business
When you follow the above checklist, it is unlikely that you will fail in your mission. However, there are legal implications that many people do not know about during any business formation. Accounting services can help you figure out all the legal details necessary to start your business.
Choosing Your Business Name
The name of your business is one of the most valuable assets of your Ltd. company, company, or any other business entity. The name affects many aspects of your business, such as reputation, sales, and even the very success of your endeavors.
As a business owner, you need to choose an appropriate name for your business before going ahead with the other company formation plans. However, choosing a name for your business is not a walk in the park, as certain laws, technicalities, restrictions, and uniqueness determine the right name for you.
Selecting The Name
The business name you choose has to be a specific word, abbreviation, or phrase that shows the type of business entity, such as inc./corp. Or incorporated/corporate, respectively. The law prohibits using certain words, such as you cannot name your business limited liability partnership, then add the word company in its name. You cannot use the word bank in the name when your business does not operate in the banking industry.
They must check any name you choose for its correctness and whether it is available for your business to be registered. The management advisory firms that you prefer to register your company with will guide you in coming up with a unique name distinct from any other company out there. You could also visit the Companies House office to file for company formation yourself.
Types of Businesses Entities
One of the first things that you do when forming a business is to choose the business structure of the company, or rather, the business entity type. We form a business entity when an individual or group of individuals creates an organization to engage in trade or partake in any such activities. The most common business entities that exist include sole proprietorship, limited liability companies (LLC), general partnerships, limited partnerships, S corporations, and C corporations.
The type of business entity you choose has significant financial and legal implications because the amount of taxes you will pay will depend on its type. The business entity will also affect whether you can get a loan or get funding from investors. In a sole proprietorship, you will be liable for your business’s taxes, but with a corporation, then the business exists separately and pays its taxes. To register your business, you will need to do it in the state where it is located.
This is the simplest type of business structure, as you will solely own and operate the business. You require a business license or local permit in some states, but there won’t be other filing requirements. These are the most popular business types since they are easy to form. The catch is as a sole proprietor, you are fully liable for the business’s losses and directly taxable for the business earnings.
Partnerships are rather straightforward as their name, as they involve creating a partnership agreement between two or more persons. There are three types of partnerships that include:
General: This is a basic partnership with minimal paperwork and filing required. Different states have their local regulations, and some might require permits and licenses to operate.
Limited: This is just the same as a general partnership, but with the clause of limited liability protection. In this business structure, one partner has unlimited liability, but the other partners are equal to their investment. The limited partners do not take part in the business’s daily operations; thus, they are silent. Each partner shares in the payment of taxes.
Joint ventures: These ventures are when two or more people are working on the same project. This union is usually for the long term and has a more limited scope than a general partnership. They sign an agreement where the group works on a common purpose while sharing management and the profits or losses incurred. Joint ventures pay their taxes like corporations.
Partnerships enjoy much liability protection, as in most cases, each partner has unlimited liability. Some states may cover some specifics of partnership liability, but one partner can cause business debts that might lead to lawsuits in many situations.
Limited Liability Company
The business owners of an LLC, also known as members, don’t have liability for the company’s lawsuits. Individual members will not be responsible for any debts that the LLC has through its bank account. The members of an LLC can choose whether it should tax them as a corporation or as a partnership. If the company has only one member, it is taxable as a sole proprietorship.
An LLC can have unlimited members, but it can’t stock. They have a flexible manner of dividing profits and losses as defined in the operating agreement. Various states have different standards for forming an LLC, but it is a fairly simple process that will only cost a few hundred dollars.
Corporates are the most complex and expensive business formation options. There are two main types, and that is C-corporations and S-corporations. A C-corporation exists as a separate legal entity independent of the company. It has officers, a board of directors, and shareholders who manage the corporation’s daily operations.
A single person can take control of all the responsibilities; thus, you can begin and manage a C-corp. A C-corp must comply with many more tax laws and regulations than the other business structures mentioned above. However, the owners or shareholders have no personal liability for business debts or liabilities.
With an S-corporation, the limited liability still applies, but it is a pass-through entity for tax. This means that the S-corps losses and profits pass through to the shareholders tax returns, and the corporate level taxation does not apply to an S-corp. one good thing about an S-corp is that there is no double taxation.
Begin Your Business Formation
Now that you are aware of the various options you have in setting up a new business, you might require the help of seasoned management advisory firms to actualize your dream. At Nesso Accounting, We can help you make plans on how to allocate your funds to the various requirements for a new business formation.
At Nesso Group, we will help you understand every aspect of forming a business within your budget and ensure that we adhere to all legal requirements. Our accounting professionals will ensure that you are in a viable business much earlier than expected. Reach out now to learn more about us and how we can help you.