Determining the right legal structure for a business can be overwhelming for many. Furthermore, every legal structure has its own pros and cons and thus, choosing the right legal structure for your subscription box business can be a confusing task.
Read these guidelines and perhaps hire a tax advisor to help you determine the most suitable legal structure for your subscription box business.
The Simplest Legal Structure For A Business Is Sole Proprietorship
A Sole Proprietorship is a simple and affordable legal structure to start with. Basically, it refers to an unincorporated business that is owned and run by one person.
In other words, according to the law, the business and the owner are inseparable. The structure doesn’t attract many upkeep duties except for the renewal of operational permits and the “doing business as” (DBA) filings that give operational details about your specific subscription business.
The personal and business income is not separate and thus, the subscription box business will not incur taxes in its own right. Instead, income from the subscription box enterprise is part of the proprietor’s income.
There is no liability protection for the subscription box business owner. In other words, if the business defaults on its debts, creditors can go after the proprietor’s personal assets.
You can file for General Partnership if you want to start the subscription box business with a partner. The structure’s functions are the same as those of the Sole Proprietorship, except for the fact that the partners share in the liability, management and profits.
The most vital upkeep requirements in this structure are the name filings and operational permits. Otherwise any other upkeep duties are those specified in the partnership agreement.
The taxation reporting is similar to that of Sole Proprietorship. However, in this structure, partners need to sign an Annual Information Return Report.
There is no liability protection in General Partnerships. The structure is ideal for a subscription box business that is run by more than one person.
If you are starting the subscription box business with your friends and an investor, then you should consider this structure. All partners share in the profits and losses.
However, the investors won’t contribute to the management of the subscription box business. The upkeep duties are similar to those of Sole Proprietorship except for the elements included in the partnership agreement.
The taxation processes are almost the same as those of the General Partnerships. However, limited partners (investors) are exempt from self-employment tax from the federal government because they do not contribute to the running of the subscription box business.
In this structure, the general partners don’t have liability protection but the limited partners (angel investors) are protected.
Corporations are quite complex and require a lot of paperwork. Moreover, you need more money to start a corporation. In other words, for a startup like a subscription box business, you shouldn’t invest a lot of time and money in handling legal paperwork.
However, it is important to note that the owners of a corporation are protected from liability because the business is a different entity.
Limited Liability Company (LLC)
This is the most popular legal structure for a business selling subscription boxes that is of a hybrid nature. It has the limited liability protection advantages of a corporation and the tax advantages of a partnership.
Although it is less strenuous to manage this structure due to lack of long meetings and boardroom deliberations, the LLC structure has a lot of paperwork. Some states require a subscription box business to submit an LLC Annual Report.
The taxation process is similar to that of the partnership structures.
Consider all the pros and cons of the aforementioned legal structures carefully before choosing. Choosing a legal structure is very critical.
It affects you subscription box business status now and into the future. Consider what you want your subscription box business to be and how you want to grow before you choose the most appropriate legal structure for a business to suit your needs.