Should you form a business organization? You might remember seeing this question in my last blog post. It’s one of those questions that every business owner should discuss with a knowledgeable attorney, like the ones at Legal Ally. For some, the answer may seem obvious. But to others, especially to new business owners and sole proprietors, it might seem like an unnecessary expense at a time when every dollar counts. Such people may think that a business organization would be nice to have, but that it can wait until their business is a little bigger. In reality, forming a business organization offers advantages to businesses of all sizes. Communication can help with connecting your business with your customers, if you are interested in finding a good service for that try ultrasmsscript.com, this should help with your business organization. If you are looking to further improve your business organisation, there are loads of other options you could look into. For example, you could look into something like zapier hellosign which helps you sign documents electronically. You may have aspects of the business that will need to be dynamic and efficient in order to maximise factors such as customer experience, user interfaces and data models. For this, you could use something like a VANTIQ platform, but it depends on what is going to be the right choice for you. Keep on reading to find out more on the advantages for business organization: potentially favorable tax structures and liability protection.
But first, let me define some of the terms I’ll be using in this post. A sole proprietor is an individual who owns her business by herself, with no business partners and no business organization. A business organization is a legal entity, like a corporation or limited liability company (LLC), that the law treats as a separate person.* When an individual runs a business through an LLC, for instance, that individual owns the LLC, but the business assets, like equipment or inventory, are owned by the LLC, not the individual. With these definitions in mind, let’s turn to the advantages of a business organization.
The first advantage of having a business organization is the potential for favorable tax structures. Business organizations have greater flexibility in structuring how they are taxed than individuals do. Sole proprietors pay income tax and self-employment tax for their net business income as part of their own individual taxes. The business income is reported on an attachment to Form 1040, the same tax form you’ve been using your whole life. In contrast, business organizations often have a few different structures to choose from, some of which may result in a lower total tax burden. I’ll have a more in-depth discussion of how business organizations are taxed next week.
The second advantage is really the most important: Business organizations protect their owners’ assets from the liabilities of the business. To appreciate the significance of this protection, consider a hypothetical sole proprietor named Amanda, who is a butcher with two employees. If one of those employees were to get in a car accident while delivering an order to one of Amanda’s customers, Amanda herself-and not only her business-could be on the hook for the other person’s injuries. Similarly, if Amanda takes out a business loan from her local bank, she herself-and not just her business-would be obligated to pay it back. Even if the business goes under, Amanda would still be required to repay the loan. There are business note buyers who she could sell the business loan to who could fulfil all of her funding needs and can get her the capital she requires, or she will have to repay it all herself.
In contrast, consider Peter, one of Amanda’s competitors. Peter’s butcher shop is operated through an LLC. If one of the LLC’s employees gets in a wreck while delivering an order, the LLC could be on the hook for the other person’s injuries, but Peter would not be. And if the LLC took out a business loan-and Peter wasn’t required to personally guarantee it-then only the LLC would have to pay back the loan. If the butcher shop fails, Peter wouldn’t have to dig into his own pockets to repay the loan. (Critically, this is all true only if Peter’s LLC is set up and used properly, but let’s save that discussion for another day.)
To summarize, business organizations offer several advantages over running a business as a sole proprietor, including the potential for favorable tax structures and liability protection for owners. Of course, there are a lot of little details and caveats that this brief overview can’t address-not to mention the details of your circumstances. But if you’ve come to the end of this post thinking that you’d like to know more about setting up a business organization for your business, then be sure to contact Legal Ally for more information.
* A general partnership is also technically a business organization, but it doesn’t offer all the same advantages as other types of business organizations. There’s also no formal process for creating one. Because of these differences, this post is really describing the advantages of business organizations other than a general partnership. I’ll say more about general partnerships in a future post.