Starting A Business Series: What Business Structure Should I Choose?
You will make so many important decisions as a business owner, chief among them being the legal structure. While perhaps not as exciting as developing a niche and honing in on your business plan, the legal structure of your business has serious implications for taxes, liability, paperwork, and your ability to raise money.
This is not a decision that should be made lightly as it has a direct impact on how your business operates in the eyes of the government and dictates your legal standing.
Each business’s structure should be based on a few main factors:
Taxes
Liability
Records
Administrative and maintenance fees
Flexibility
Future needs and growth
So what are the options for establishing a business entity? Let’s take a look.
Sole Proprietor
A sole proprietor is the simplest business entity as it is not legally incorporated. Free of legal duties, you are able to run the business in any way you see fit offering more control. This can, of course, increase your tax bill since you and your business are taxed as one.
While increasing the ease and simplicity of ownership, this designation leaves owners legally vulnerable meaning if they were sued, their personal assets would be on the line.
Limited Liability Company (LLC)
Perhaps one of the most well-known entities for small businesses is an LLC. This type of legal entity provides tax benefits while also offering a level of liability protection. Let’s start with the fun part: taxes.
When you create an LLC you have more flexibility and can choose how you want your business taxed, either as a sole proprietor, partnership, S corporation, or C corporation. With LLCs, many owners take advantage of a process called flow-through income taxation which allows the business income to be filed as part of the owner’s personal income, as opposed to filing separately. This can be convenient but as your business grows can prove to cause a higher tax burden.
An LLC also provides you with some legal protection in the event that your business gets sued. While not a pleasant thought, it is best to be prepared for anything and with an LLC your personal bank account might not be on the line.
Corporation
There are two main types of corporations to be aware of S corp and C corp each with their own unique set of advantages and disadvantages. The main difference with any corporation is that the business is separate from the owners which can have important tax and liability implications.
With an S corp, the entity doesn’t have to pay taxes like an ordinary corporation, avoiding any double taxation on business income and personal income. S corps aren’t taxed at a federal level which can result in big savings. With an S corp, your business is protected against liabilities more so than an LLC proving a greater safety net.
C corps are corporations through and through. The business is taxed separately from owners. It has limited liability, protecting personal assets and this designation can also have stock options. There is more paperwork and upkeep with this designation, and it is best suited for larger companies.
How do you know which entity is right for you?
When you are choosing a business entity, here are a few things to keep in mind.
To what extent do you need to be protected from legal liability?
How can your business maximize its tax situation?
Will administrative fees and upkeep be a roadblock?
How flexible is the entity?
What are your company’s future needs and which entity will best suit that?
Our firm understands the importance of choosing the right legal designation and want to be there to help you. Make an appointment with us. We’ll help you create a list of important questions you should think about when choosing an entity, and refer you to a business attorney or tax accountant that can help you finalize the details
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