Do I Need A Business Entity? Part 2
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3. Partnership
Partnerships involve two or more people coming together to run a business entity.
Pros of Partnerships
- It can be informal, hence, there are few filing and maintenance requirements.
Cons of Partnerships
- They are not recognized as legal entities for tax purposes and partners bear losses individually.
Deciding to Incorporate
Incorporating a business is a method of business protection where a new or existing business registers as a limited company. This also gives the business owners legal protection as the business becomes a legal entity with a separate identity from those who own it. Majority of UK companies are Limited liability companies.
Incorporating the business is optional and most business owners might prefer to be sole traders. However, incorporation becomes necessary when there is need to bring in co-ownership.
Making the decision to incorporate your company should be done by consulting with an accountant.
Selecting the Most Appropriate Business Entity Type
To choose a business entity the major factors to be considered are legal protection, tax treatment and paperwork requirements (registration cost, the complexity of the process).
Filing fee differs across various jurisdictions. It is also important to understand the costs to renew and maintain that registration in your jurisdiction.
Also check for the minimum paid-in capital requirements in your jurisdiction to ensure that your start-up qualifies.
Again, I would advice that if you can afford it, do not only consult a tax professional but also a business lawyer on which structure is optimal for the business, given where it is currently and the vision of growth.
The Bottom Line
The business entity you choose can affect everything from your finances, legal exposure and even how people perceive your business.
As a start up, Sole proprietorships and general partnerships are good places to start. With time and business growth, evolving into an LLC might be next step.
Truth is, there’s no single best business entity choice for all small businesses, one can only select the most appropriate by consulting professionals.