One of the most important decisions you will have to make when starting your own business is which type of business structure to use. This decision will affect several key components of your business including taxes, personal liability, and what kind of paperwork you need to file. There are several different types of business structures so it is important to carefully consider which one will best suit your business.
Business Structure Options
There are several different types of business structure but some of the most common include sole proprietorship, partnership, limited liability company (LLC), S Corporation, and C Corporation. Each one has its own advantages and disadvantages so you will want to consider your personal business model to decide which is best for you.
In a sole proprietorship one person runs and owns the business and its operations. As the sole proprietor, you are liable for all of the business’s financial obligations. This is the easiest to set up and works well for low-risk, home-based or retail businesses.
In a partnership, two or more people own and operate the business. Profits are divided among the owners and reported on their tax returns.
Limited liability company (LLC)
An LLC is a hybrid between partnerships and corporations. It limits the liability of its owners like a corporation but allows the profits to be taxed on a member or corporate level.
An S corporation has the liability protections of a corporation along with additional tax benefits which makes it appealing to small business owners. However, it has two main limitations: it can’t have more than 100 shareholders and all shareholders must be US citizens.
This is a type of corporation in which the profit is taxed first on the business level and then a second time on an individual basis when earnings are distributed between shareholders. They have multiple classes of stock and an unlimited number of shareholders.
Deciding Which Structure is Right for You
There are several things to think about when choosing your business structure. Here are a few main factors to consider to decide which one is right for you.
- Control: How much control do you want to have over your business? If you want primary control, consider a sole proprietorship or an LLC. Partnerships involve shared control and corporate ownership requires a board of directors.
- Capital investment: Corporations can provide much needed funding through investors, bank loans, or selling stocks. However, sole proprietors use their own credit or take on partners to help do so. An LLC may also have a harder time raising capital funds, but it may not be necessary for the owner to use their own personal credit.
- Complexity: Some structures are much simpler than others. For example, sole proprietorship is the simplest business structure, but you will need to figure out funding. Partnerships require more signed agreements while corporations and LLCs must report to state and federal governments.
- Liability: A corporation has the least amount of liability because creditors or customers can sue the corporation but not you personally. LLC has many of the same protections while partnerships share liability. Sole proprietors carry all financial liabilities.
- Taxes: Sole proprietors and LLC owners pay personal income taxes, while partnerships claim their share of the profits as personal income. Corporations file their own tax returns, paying taxes on profits, but they also have more exemptions.