So you want to start a company? That is great! But what kind of company you would like to form? Don’t be clueless and for God’s sake do not take any decision in haste because your future financial condition will be dependent on this decision in myriads of ways. Now I am not asking here what kind of service you are supposed to offer (because you know that better than anybody else) but what legal form your company is supposed to take. This is the single most important decision that will who are eligible to invest in your company, how you are supposed to pay the taxes or how your financial condition is going to get affected by it.
Below are the three important things that you need to take care of before zero in on a decision:
Ownership: Depending on the business types, there are certain limitations on the number of people who can invest in a company. So, if you have a large plan and want to rope in foreign investment in the form of shareholders, corporate structure is the way to go. Therefore, my humble suggestion is please take this seriously and sit down with an accountant and an attorney to figure out which legal business form best suits your purpose.
Tax: The infamous three letter words that everyone hates. Honestly speaking, no one likes paying taxes and I hope you share the same feeling. So that means, you should abhor the idea of paying taxes twice. But it can happen to you if you do not take it seriously. May sound insane, but you may find yourself paying taxes once on income for business and then again for the profit distributed to you. So, figure out a solution before it is too late.
Liability: Corporation has an individual identity and that being that if the company is sued, individual shareholders will be not hold responsible. The assets of the company can be seized or freezed but the personal assets of the shareholders will not be seized. However, there are certain exceptions but rest assured, liability of personal share holder is largely limited.
So, now you are fully aware of the legal intricacies of forming a company. Let’s move on to the next big chapter that is selecting a legal business framework:
Sole Proprietorship: This is the best business model for individual who does not like the idea of being tied to a legal framework. It is super easy to form. No additional paper work needed and the best part, there is no such need to file corporate income taxes. However, on the flipside, you will not have any liability protection. This is something that you need to be careful about. If your business is sued, your personal assets can be seized and in some worse cases assets of your spouse can also be seized.
Partnership: In this business model, ownership of the company is shared with two or more people. There is no such legal intricacy involved in the process but it is advisable to draw up a partnership agreement. And to your relief, there is no such thing as double taxation. On the downside, each partner will have unlimited personal liability.
LLC (Limited Liability Company): This is the most popular legal business framework which is increasingly being adopted by business owners because of its unique flexibilities and other benefits. This business model provides personal liability of the business owners. Another unique feature of LLC is that it lets you share profits unequally and thereby rewarding those owners who are working hard to make the business a hit. However, it has its share of disadvantages too. Laws of LLC vary wide depending on the state and countries you are living. And there are certain restrictions on the number of investors one can have in a business and sometimes, foreign investment is allowed.
“S” Corporation: This is a kind of business model that provides personal liability but at the same time, it also provides pass through taxation. Since the laws of S Corporations are less complicated, it is a popular choice among lawyers and accountants. As far as its disadvantages are concerned, it does not let you distribute profit unevenly and you need to pay for the state corporate fees.
“C” Corporation: This business model proves the highest level of personal liability protection to investors and there is no such restrictions on the number of people who can invest in it. But double taxation is here and there is no way you can avoid this.
Author Bio: Michael Evans is a passionate blogger and he has written different articles on Cyprus Taxation.