Search Mast Business :  

Choosing Legal Entity For Your Business < Business Articles By Mast Business Directory

Executive Summary

A tax structure of a business can be chosen by business owners just with a check of a box. This decides the class of income tax that is applicable to the business. The type of business as viewed in the eyes of the Income Tax department is called its business entity. The choice of such business entities is of great significance. From the legal, revenue tax and business perspective, the selection of entity should be made with a very careful decision which optimizes the benefits and tax-pay structure against the Income Tax Act. The factors that derive such decision making process are derived from the issuing of securities, attracting public investments, the management structure possessed by the business and the count of employees and their structure in the business organization employee compensation provided, the near and the distant (long term) goals that decide the booming/ loss of a business. In this article we will explore what choice do the business owners have in choosing such entities and what is the benefit of each entity.

We will first discuss various factors which affect the choice of entity and the look at each of the choices in entities available for a business. The various factors that play major roles for choices made by business owners are as follows :

Factors affecting choices of entities

Different levels of taxation

A choice should be made by business owners regarding the effects and benefits of corporate level taxation. It is commonly observed that the corporates, LLCs and certain partnership firms are superior compared to C corporations due to the incentive of “tax-through” structure that is offered to them. This is true for many cases; the S corporations are allowed to pass through one layer of taxation. Thanks to this waive off of this one layer of tax, S corporations shareholders and members have to pay much lesser types and amount of taxes than what C corporations are subjected to. Clearly, a C corporation is superior in terms of attracting investments in the market, but it may be a completely lost game to arrive upon a hastily made decision in choice of an entity without evaluation the other ones; because manipulation of tax system may lead to choice of a totally inappropriate entity.

Observing corporate formalities

It’s the decision of a business owner to decide the business structure that best fits the needs of averting taxation rules. Small business owners fail to observe corporate formalities which involve tedious tasks like maintenance of minutes and other such records. In many cases, it is observed that it exposes business owners to liabilities bend the corporate veil and make an attempt to directly reach the shareholders. Some corporate formalities are not followed in certain entities which is an enormous favor that the business owners do for themselves. The agreement which governs a business can be customized according to the business requirements. This particular operating document can manage to not fulfill the formalities for keeping such records. Thus a lot of time, money and resources can be saved through such litigants.


Money is the underlying goal of any business. Money derives a business to make nothing else, but more money. In case of multiple owners, a decision whether one owner benefit due to losses faced in the financial year, whether the company is capable of long term profit/loss. All these factors contribute in choice of an entity ultimately. The operating agreement can also be customized such that profit is diverted to one owner whereas loss to another.

A look into different entities

Sole Proprietorship

It is the least regulated, most commonly found types and the simplest form of business organization. Profits, liabilities, legal and tax issues are up to the owner himself. Thus, the total control of the business is in the hands of the proprietor. The business ceases to exist upon the owner’s death. In case of the proprietor’s death, the charge can be taken over by a family member or some other person. A business owner’s personal and business related assets face a lot of risk in this type of legal entity. A lawsuit against the business can lead to the judgment against the owners’ personal assets which is a lot of risky business. Even for a liability, the proprietor is solely responsible and hence faces unlimited risk from limitless possibilities and charges against him. However a proprietor has to go for various insurance policies to lessen the number of potential and predefined risks that he might face. Taxes are levied on proprietor’s personal income. Proprietor also has lot of options to change to another entity that might give him benefits regarding taxes on sales and other categories.

General Partnership

It is association of two or more persons in a business. These are called as “co-owners”. Each partner exercises control over management and shares profits of the firm in the predefined ratios. These ratios are based on each partner’s individual investments and amount of effort and knowledge put in handling the business. Each partner can be potentially held responsible for the liabilities of the firm and indebted accordingly. Even a wrong decision made by one partner can be dangerous to both co-owners’ assets. To avoid this, the co-owners file a treaty as a LLP with the Secretary of the State with a issuing of a certificate. Personal tax liability of each co-owner is determined by accounting for his own share of income from the firm and the losses thereof. Essentials other than any formal filings with the State include license to conduct business, trademark registration, permits, etc. An agreement involved in the partnership may provide incentives for tax benefits that are available.


A legal entity such that it is separate from its shareholders (who are its owners) is termed as a Corporation. It comes into existence after filing some papers with State Secretary and other formalities. A corporation continues to exist irrespective of status with its shareholders. Every corporation is comprised of shareholders (owners), officers and directors to govern them. Each category is embedded with different roles and responsibilities. Directors are appointed by the shareholders who govern the corporation and its daily routine. A sole individual can satisfy all the three roles mentioned above. Debts cannot be recovered from each of the three parties. Thus the personal assets of each party are protected from any obligations of the corporation. However, shareholders are often considered as liable to pay off the debts of the corporation and held responsible as a guaranty to repay the loans availed. It is very important to keep the dealings of the corporation away business of the corporation to ensure no one is liable for any obligations that the corporation faces.

Limited Liability Company

In a limited liability company (popularly termed as the “LLC”) is arranged by the state to offer limited liability just like a corporation but with an extra option i.e. “pass through” of taxes. LLC is actually is a compromise between partnership and a corporation. An LLC is owned by one or more “members” who are the interest holders. Any member has control over management decisions of the LLC. Members can designate managers for the purpose of managing entity like in corporations. Perpetual existence can be exercised, i.e. the LLC can continue its business after the expiry of its shareholders. The owners of the LLC put only their investment at stake within the LLC. Owners’ personal assets are not at stake. This is applicable if the owner himself hasn’t requested to keep his assets under mortgage. The new regulations passed by the State indicate that the LLCs which have more than a single owner running and taking charge over the business will have to abide to the taxation rules as that of a partnership company. This is the default rules to be followed with respect to taxation. However there is an option to elect as a corporation and thereby follow corporate taxation rules. Upon corporate tax treatment, an LLC organization will be taxed just like a corporate should. The process which is involved in bringing an LLC into existence is closely related to that of creating a corporation. The administration of the business is determined with the help of an “operating agreement”. This agreement determines key features of an LLC like the rights and powers that can be exercised by the LLC’s members, managers and employees.

Thus in this article, we have explored the various factors that should be taken into consideration while choosing a legal entity to your business. We have gone through the pros and cons of each of those factors. Lastly, we have acquired some knowledge on different legal entities that a business can be categorized into. Remember that, the very first thing to be done in the checklist while starting a business is to go through legal liabilities and making a right decision to establish your business under the most suitable entity.

Related articles

More business guides and listings

Baby Products Business
Beauty Business Guide
Building And Construction Business
Business Services
Business Coaching
Business Consulting
Business Management
Business Support Services
Business Opportunities
Business Cards
Cars Business
Children Products Business
Communication Solutions Business
Financial Services
Fitness Business
Education Business
Electrical Business
Entertainment Business
Energy Business
Flowers Business
Gifts Business Guide
Health Business
Insurance Business
Logistics Business
Marketing And Advertising
Mobile Phones Guide
Motorcycles Business
Office Products Business Directory
Photography Business
Printing Business
Real Estate Business
Security Business Guide
Toys Business Guide
Travel Business
Web Design Business
Web Hosting Business
Writing And Editing Business

Related information

Vehicles Business Information
Business Services Information
Auto Business Information





Home |  Directories | Add your business |  Guidelines | Contact us | About us | Terms of use

Copyright © 2009-2012 All rights reserved. - Business Guide and Directory To Submit Site or add url.

Retail Shopping Business Information