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Sole
proprietorships, partnerships, corporations,
and limited liability companies are the
most common legal structures for small
businesses. No one legal structure is
right for all small businesses.
Whether
starting the business as a sole proprietor
or choosing one of the more complicated
organizational structures depends on several
factors.
A
sole proprietorship is the basic and
simple form of a business organization
and has no existence apart from the owner.
The spouse can be an informal owner of
your sole proprietorship.
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The
business liabilities are also the owner's liabilities.
Ownership (proprietary) interest ends when the
owner dies.
The owner undertakes the risks of business to
the extent of all of his/her assets. There is
no differentiation between the business and the
owner's private assets. The owner is responsible
for loss, gain or damage.
The owner is responsible for estimated tax payments
on a quarterly basis to the IRS, if the estimated
tax payment is more than $500. Sole proprietors
pay taxes on business income on their personal
tax returns.
A
partnership is the relationship existing
between two or more persons who join together
to carry on a trade or business. A business
with more than one person that is not incorporated
or organized as an LLC is a partnership by default.
The term partnership includes a syndicate, group,
pool, joint venture, or other unincorporated
organizations that carries on a business and
is not classified as a trust, estate or corporation.
Each person joining the partnership contributes
money, property, labor or skill and expects
to share in the profits and losses of the business.
A partnership agreement or added modifications
may be oral or written. If there is an oral
agreement, witnesses should be present or it
should be recorded on tape.
Generally, a partner's share of income, gain,
loss, deductions, or credits is determined by
the partnership agreement. The liabilities of
a partnership are determined by the number of
shares (s)he acquires when signing the agreement.
However, the liability is every partner's responsibility
including his personal assets depending on the
percentage (s)he owns in a partnership.
A partnership is not a taxable entity, and each
partner is responsible for paying estimated
taxes and filing tax returns.
A
corporation is the most important form to
organize a business because it comes into existence
by an act of the state and therefore is a legal
entity. It has a definite existence through
legal papers filed with the State, generally
the Secretary of State or the Corporation Commission.
A corporation has perpetual existence as long
as it is compliant with annual filing requirements
of the Secretary of State or the Corporation
Commission.
Registration of a corporate name shall contain
the word "corporation," "company,"
or "incorporated," or shall contain
an abbreviation of one of such words.
The corporate name should not be the same as,
or deceptively similar to, the name of any domestic
corporation existing under the law of the same
state in which the new corporation will be registered.
A corporation provides protection from personal
liability for business debts. The liability
of its owners is limited to their investments,
and their person estates are not liable for
the obligations of the corporation. However,
failure to comply with and follow corporate
formalities or keep adequate records can result
in the loss of the limited liability status.
Corporations consist of shareholders, who are
the owners of the business. A minimum of two
persons is required to create a corporation.
A board of directors, which is elected by the
shareholders, manages the business.
S
Corporations: Certain corporations can choose
to qualify under Subchapter S of the Internal
Revenue Code to avoid the imposition of income
taxes at the corporate level while retaining
all the advantages of a corporation. Income
from an S Corporation is taxed as personal income
on Schedule E (Form 1040).
A corporation must meet these requirements to
qualify for S Corporation status:
·
Be a domestic corporation.
· Not be a member of an affiliated group
of corporations.
· Have only one class of stock. Not all
shareholders need to have the same voting rights.
· Have 35 or fewer shareholders.
· No shareholder of the corporation can
be a non-resident alien.
· Shareholders must be individuals, estates
or certain trusts. Corporations, partnerships
and non-qualifying trusts cannot be shareholders.
Limited
Liabilities Companies (LLC) combine some
of the best attributes of corporations and partnerships,
including limited personal liability and one
level of taxation.
LLC owners report business income and losses
on their personal income tax returns, thus avoiding
double taxation.
LLC's are governed an operating agreement similar
to corporate bylaws.
State laws govern the organization of an LLC
and set forth minimum requirements that must
be met to form a limited liability company.
Articles of organization must include the name
of the LLC, the address of the registered office,
the name of a statutory agent, a dissolution
date, and information about management.
Filing requirements and fees are similar to
those of a corporation.
Each form of business has advantages and disadvantages.
The independent truck-owner operator should
carefully study the options and make a decision
based on his or her personal circumstances and
applicable state and tax laws. An accountant
or attorney can answer specific questions and
help the owner-operator make a decision that
is right for his or her trucking operation.
Once the owner-operator has selected a form
of business organization, (s)he must make sure
that (s)he understands the specifics of that
structure and follows the requirements to stay
compliant with federal, state, local and tax
laws.
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