What is the best legal form for your small business?
Many entrepreneurs ask what type of legal form is best for their small business. Unfortunately, many others never consider the question. The answer is that the best legal form for your small business is the one that will best help you achieve your goals. There are advantages and disadvantages to each, and a small business attorney can discuss them with you and help you decide.
If you are already doing business and have not formed a legal entity for your business, then you are likely operating what is known as a sole proprietorship. The advantages of a sole proprietorship are that they are simple and inexpensive. The owner simply reports profit or loss on their personal tax return. The main disadvantage of a sole proprietorship - and it is a big one - is that the owner is personally liable for business debts. This means that collection actions and lawsuits can seek to recover from the owner's personal assets!
A general partnership is basically a sole proprietorship - only for partners. The advantages and disadvantages of a general partnership are the same as those of a sole proprietorship. Profit and loss are reported on the partners's personal income tax returns, and the partners are personally liable for business debts.
In a corporation, owners have limited personal liability for business debts. Owners report their share of the corporation's profit or loss on their personal tax returns. Profits of the corporation can be allocated between owners and the corporation and may result in a lower overall tax bill. The main disadvantage of operating as a corporation is that there is more paperwork involved, and the business is a separate taxable entity with its own tax return.
Limited Liability Company
Often abbreviated as LLC, a limited liability company provides its owners with limited personal liability for business debts even if they actively participate as active managers of the business. LLCs may be formed by a single owner or multiple owners. In Georgia, LLCs and corporations are registered with the Georgia Secretary of State (www.sos.ga.gov).