Choosing your business structure is one of the most important fundamental steps to starting your business. This decision will affect you and your employees, as well as the financial makeup of your business. It also can protect you if something goes wrong with your business and you’re left liable.
No matter if you’re a startup or an established sole proprietor, you need to understand the differences in business structures so you can make a smart choice about the future of your business. This isn’t a decision that should be made without the right expert advice. No two businesses are alike, so no one form is better than the next. Let’s break down the different types of business structures so you can determine which makes the most sense for your business.
Sole Proprietorship
Are you the only member of your business? If so, then you might be okay just leaving things as a sole proprietorship. This is the most common form of business organization, and it’s easy to form. Because you’re the owner and only employee, you have complete control over the entire organization.
While starting a sole proprietorship is easy and straightforward, it does come with disadvantages. The biggest issue sole proprietors face is liability. If something goes wrong, you’ll be personally responsible for all financial and legal obligations of the business. Depending on the type of business you practice, this might be a risky situation.
Corporation
One of the most well-known types of business structure is corporations. There are two kinds of corporations: s-corporations and c-corporations. These are both legal entities created in order to conduct business. They are considered to be separate from the individuals who founded the company, and only the corporation itself can be held responsible for taxes and legalities. This means individuals are not personally responsible for the actions of the business.
Starting a corporation is costly and time-consuming. It also requires extensive, accurate record-keeping. S corporation avoids a lot of the same taxation requirements by passing income or losses into individual tax returns. The C corporation is taxed separately from its owners.
Partnership
If you’re in business with more than one person who agrees to share profits or losses, this is a partnership. The main advantage of this type of agreement is that you don’t have the same tax burden as the profits. The losses are passed through to partners who report them on individual tax returns.
Yet again, like a sole proprietorship, partnerships mean shared liability. There is no legal or financial protection for those in the partnership. However, many choose this business structure because it’s easy to form.
Limited Liability Company
The limited liability company (or LLC) is considered a hybrid form of partnership. This has become popular in recent years since it takes advantage of many of the benefits of a corporation and a partnership. Again, profits and losses are passed through to owners without additional business taxation, and the owners are still protected against personal liability.
Selecting the Right Business Entity
Now that you understand the different business structures available for owners today, it’s time to consider what’s important with your business. From liability to ease of formation, no two offer the same benefits and disadvantages. Like most parts of starting a business, there are no one-size-fits-all solutions. Here are some important questions to ask yourself:
- How much protection do you need legally?
- What is the best way to keep tax costs low?
- How lengthy and expensive is the formation process?
- Can this formation adapt to future needs?
Depending on the type of business you’re running, you’ll have different needs. No two businesses are alike, therefore there are no clear answers. It’s best to speak to a business lawyer as well as a tax specialist to see what structure makes the most sense for your needs. Finally, remember that your business will likely grow in the next few years. You need a structure that can accommodate that growth and strengthen your business.
