Finding the Right Business Structure | John Deere Financial [MUSIC PLAYING] - Deciding what kind of structure is right for you is a critical step in forming a new business, since sole proprietorships, partnerships, corporations, and limited liability companies, all have unique pros and cons when it comes to operating structure, registration, filing fees, liability, and taxation. Which business structure you choose really depends on your personal circumstances and preferences. Let's start by taking a look at the sole proprietorship. A sole proprietorship has the simplest operating structure because it really only needs one person to make 100% of the decisions, you the owner. Most states don't require sole proprietorships to formally register, which means you also won't have to pay filing fees. The sole proprietor may still be required to obtain special licenses or permits depending on their business. Because the owner is the only official in a sole proprietorship, they are liable for all obligations and debts. The owner is also taxed individually. Net business income or loss is combined with personal income and deductions and taxed at individual rates. That means you won't have access to the potential tax advantages of a corporation. The next business structure we'll look at is a partnership. A partnership requires, you guessed it, at least two partners. Partners are usually equally responsible for business decisions. However, if you have a limited partnership, one partner can be silent by contributing money without having any say in the company. It's recommended for partnerships to register with the Secretary of State's office and obtain all licenses and permits. Like a sole proprietorship, owners may be fully liable for all debts and obligations. And each partner is taxed individually through personal income tax. Now forming a corporation can be a lot more complicated than starting a sole proprietorship or a partnership. However, the extra cost and effort can be worth it in the long run. A corporation must have directors to lead the company affairs and approve transactions, officers to oversee daily operations, and shareholders to have ownership in the company. However, in smaller corporations, it is legal for one person to act as the sole director, officer, and shareholder. To form a corporation, you must file articles of incorporation with the Secretary of State's office, which means you'll need to pay a registration fee. You'll also be required to obtain proper licenses and permits. Corporations must comply with more regulations and tax requirements, because owners are generally protected from personal liability. Liability instead is placed solely on the business entity. Plus corporations have access to tax credits that sole proprietorships and partnerships don't. And how you pay taxes is determined by whether you file as a C corporation or an S corporation. C corporations pay taxes at corporate income rates, and their shareholders are taxed personally for any distributions or dividends from the corporation as corporations are passed through entities, which means they are treated like sole proprietorships and partnerships and not taxed at the corporate level. There are limitations on what can classify as an S corporation, but most small businesses qualify. Finally, we have Limited Liability Companies or LLCs. LLCs give you the flexibility of a partnership and the protection of a corporation. The catch is you can only form for a limited period of time. You'll have to register unique business name in your state and obtain legal licenses and permits. And you must file articles of organization with your secretary of state. It's not required to write an operating agreement, but it's recommended that you do so you can adhere to clear rules and regulations. As the name suggests, a member's personal liability is limited when it comes to business decisions and actions. Generally an LLC is taxed like a sole proprietorship or partnership and income is passed through to the members as ordinary income. The LLCs members may select different tax treatment, however, so you should check with your tax advisor as to what your specific needs and options are. When it comes to forming your business, make sure to consider these criteria to see which structure works best for you. For further help, consult your financial advisor. [MUSIC PLAYING]