A common question posed to both CPAs and attorneys is how should I organize my business and should I incorporate. The answer used to be simple. It depends. The answer has now changed. Now the answer is maybe. Perhaps a discussion of these answer is in order.
The form of business selected will impact both the legal and tax liability of the entity and its owners.
In terms of legal liability the three alternatives are:
- Sole Proprietorship
- Partnership
- Corporation
A sole proprietorship has one owner, a partnership has two or more owner's and a corporation can have one or multiple owners. As far as legal liability goes, the only business form that provides some form of protection from legal liability to its owners is the corporation. Setting up a corporation is almost a no brainer when the business owners want protection from creditors and other potential clamaints, for their personal assets.
The choice of business form will also drastically impact the income tax of both the business and its owners. Unless you are extremely savy in the area of taxation, it is best to get professional advice with this choice. Each type of entity has its own set of advantages and disadvantages when determining which entity type is best. In recent the IRS have established hybrid forms of business that allow the tax advantages of being a sole proprietor or partner with the liability limitations of a corporation.
Your CPA or your attorney should be able to help you navigate this and other business decisions.
Wes Hill, JD, CPA (678) 522-9253
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