This was originally published on Monday, July 27, 2015, in the Pacific Daily News. Click here to subscribe to the PDN.
Q: I am thinking of starting up a small business. I am not sure if I want a partner or want to go at it alone. Besides the decision-making and being financially responsible how would taking on a partner change my business?
A: The business structure you choose is more than decision-making and financial responsibilities. It changes how your taxes are paid and who is legally responsible for the business. There are several types of business structures, choose which best suits your business needs.
Sole Proprietorship – This is the most common type of business probably because it is the most simple. The owner is responsible for the entire business. There is no distinction between you and the company. As the sole owner you are completely responsible for all the debts, assets, liabilities, profits and losses. Because your income is income from the business it is not taxed separately. When filing for taxes you file your business on the same income tax filing.
There is no legal separation between you and the company. You can be held personally accountable for any lawful responsibilities. If your company is sued you are personally being sued. It may be harder to be funded or to obtain a loan. One should have a good to excellent credit score when starting a sole proprietorship. It will make funding much easier. The cost to start up a sole proprietorship compared to other business structures is marginal.
Partnership – A partnership is formed when two or more people contribute money, time, effort, and skill into the business. Partners share losses and profits of the business. Unlike a sole proprietorship the company records gains and losses through an annual information return. The individual partners then report any income or losses on their personal income tax returns.
There are three types of partnerships:
• General Partnerships divide the profits, liability, and managerial duties equally. If the partners decide that the distribution is other than equal it must be stated in a partnership agreement.
• Limited Partnerships allow the partners to have limited decision making and liability. This business structure is good for a partner who wants to invest but does not plan to stay part of the business for a long time.
• Joint Ventures are general partnerships that last for a limited time.
Partnerships also are liable like a sole proprietorship but the partners share the responsibility. They are responsible for the business’ debt, actions of the business and of the other partners. It is easier to obtain funding because partners can combine resources. Partnerships are rather easy to form but legal guidance should be sought to ensure all partners agree on the how the business operates.
Limited Liability Company – This business model combines the limited liability of a corporation with the flexibility of a partnership. Usually referred to as an LLC it can comprise of individuals, several corporations, or even other LLCs. Like a partnership a legal document should be created to lay out how business decisions and responsibilities are handled. Members of an LLC are separate from the liabilities of the business. The LLC incurs the debt and the members’ personal assets are protected. One of the greatest advantage of an LLC is the ease in record keeping and the start-up costs are minimal compared to a corporation.
Your company can also be classified as a corporation or an S-corporation. These business structures are more complicated. Corporations have shareholders instead of partners or members.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at firstname.lastname@example.org and read past columns at the Money Matters blog at http://www.moneymattersguam.wordpress.com.