The most common choice for a starting business structure is a sole proprietorship. A favored choice as this is the simplest form of ownership available for a single owner. In addition, its requirements include just a tad bit more than a tax ID number. However, in other cases, when there are legitimate concerns surrounding taxations or liability issues, or if multiple entrepreneurs own the business, other types of business structures should be considered.
The decision usually depends on many factors, including how many owners the business will have, the nature of the company, and the degree of concern for the issues regarding liability and taxation.
The first step is choosing an appropriate organization type. The owner needs to make this choice with much consideration. You should definitely consult attorneys, accountants, and business counselors to make an informed decision.
Types of business structures
Limited Liability Company (LLC)
An LLC offers you protection in terms of personal liabilities, for example, your personal assets like your car or savings account or your living space (apartment, house). These are not at risk if your company goes bankrupt or if someone sues it.
As stated before, LLC allows your profits and losses to pass through to your personal revenue without paying taxes. Although, all partners of LLC must either be self-employed or have to pay self-employment tax to facilities like Social Security or Medicare.
By signing a free LLC Operating Agreement, you get the benefits of a corporation combined with that of the tax benefits of a sole proprietorship or partnership. This way, they reduce the personal legal accountability of the owners. Having an LLC Operating Agreement is necessary to obtain the various benefits and protections. They organize the LLC and set out the principal responsibilities and obligations.
A disadvantage of LLC is when a member joins or leaves. In most states, there is a requirement for the LLC to dissolve and reform with new members should such an event occur. Unless this is already accounted for and an agreement is in place for the buying, selling, and transferring ownership.
If you want to start a medium-risk or high-risk business, this is a great option for you, particularly if you have personal assets.
A sole or individual proprietorship is the simplest and most basic business structure. Having your own business gives you complete control, plus you automatically become a sole proprietorship if you begin to begin business activities but don’t register for any other kind of business.
However, being a sole proprietorship has its drawbacks. They are not separate business entities, which means that your ownership’s business assets and liabilities are not in a separate compartment. As a result, you can and will be accountable for the obligations and debt that come along with the business.
With sole properties, you can receive a trading name; raising money is a difficult job, as you can’t sell stock and bank loans are hard to come by for this business type.
They are, however, an appropriate choice for anyone wanting to start a low-risk business or who wants to try out a business idea before solidifying it into a formal business.
A partnership is a simple structure for businesses that have two or more owners. There are two types of partnerships in this category: Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs).
A limited partnership consists of a constant partner with unlimited liability while the others have limited liability. The latter also has restrictions in regards to controlling the company. All this is agreed upon and documented. The profits must pass through to personal tax returns, and the owner (with unlimited liability) must pay self-employment taxes.
Limited Liability Partnerships have similarities to Limited Partnerships, but everyone receives limited liability here. With this approach, LLP can protect each partner from debts against the partnership, meaning they won’t suffer from the mistakes of their other partners.
A corporation, also called a C Corp, is a legal establishment that is independent of its owners – it does not combine with their personal assets. Corporations can make profits, pay taxes as well held liable.
They offer the most secure protection against personal liability, but building it up takes up a great deal of money. They also need to keep a comprehensive check on record keeping, reporting, and various operations.
Unlike the above-mentioned business structures, c corps have to pay income tax on their revenue. Sometimes twice when they make a profit and again when they are to pay shareholders on their personal tax returns. A benefit here is that even if a member leaves or decides to sell their shares, the corporation will continue, mainly uninterrupted.
Like LLC, they fall under the category of people wanting to start medium or high-risk businesses, who need to raise money or plan ongoing public and sell it to a potential buyer.
The design of the S corporation is such as to counter the drawback for the C Corp concerning the payment of double taxation. They allow profits, a fair amount of losses to pass through to the owners’ personal income without having to pay taxes. To be identified with slightly different criteria, S Corps are to file with IRS to receive that status.
Like a C Corp, this corporation has an independent life. Thus, it is good for business ideas that would basically be a C Corp but will classify as an S Corp given their criteria.
Before We Part!
Ultimately, the decision is up to your preferences, needs, and circumstances. However, before choosing a business structure, consider your options carefully and build up your business steadily. The more you allow yourself to rush into it, the more disadvantage you’ll have. Be sure to consult with business counselors or other professionals to determine what works best for you.