Starting out: Determine how to organize

Have you ever thought of starting a business but did not know where to begin? The first step is to determine how the business will be organized. The most common forms of business organization are proprietorships, partnerships, corporations and limited liability companies. Each of these forms has advantages and disadvantages that should be analyzed before making a decision.

A proprietorship is owned by one individual and is the simplest type of business to start. The cost of organizing is low, and there is limited oversight by governmental agencies. The greatest drawback of the proprietorship is unlimited liability, which means that the owner is liable to creditors for debts incurred by the business. Other disadvantages are limited lifespan and limited recourses. Normally, this type of organization is used by small businesses.

A partnership is a non-taxable entity that, like the proprietorship, has a limited lifespan and unlimited liability. Although it is non-taxable, a partnership must report its revenues, expenses, assets and liabilities to the IRS each year. The partners must report their share of partnership income on their personal tax returns. A partnership has the advantage of bringing together various managerial skills and experience. However, raising large amounts of capital may be difficult if the number of partners is minimal.

A corporation is organized under state and federal statutes as a legal entity separate from the individuals who operate the business. A corporation has an indefinite lifespan and the ability to raise large amounts of capital by issuing stock. This form of business organization can borrow money in its own name resulting in limited liability for stockholders. The major disadvantage of the corporation is double taxation on dividends, or stockholders&8217; income. Because this form of organization is used by large businesses, governmental and regulatory agencies oversee the reporting of business operations.

A limited liability company combines the attributes of a partnership and a corporation. This type is organized as a corporation and can elect to be taxed as a partnership.

The above will get you started, but if you are serious about opening a business, seek further research and professional advice