Business structures come in many forms, and each has its own specific purposes. Here, we’ll take a look at these structures to help you determine which one you should choose for your business.
First, let’s go over a few of the most common business structures. These include:
- Sole proprietorship: A sole proprietorship is formed merely by one person going into business themselves. No paperwork or registration is needed, and the owner and the business are considered to be the same entity.
- Partnership: A partnership works like a sole proprietorship, but where more than one person is involved. Each person is personally liable for the business as a whole.
- Limited liability corporation: An LLC is intended to separate the liability of the business from that of the owners. However, as far as taxes are concerned, it works the same as a sole proprietorship or partnership.
- Corporations: Corporations operate as their own entities, and thus are liable for their own taxes, lawsuits, risks, and so forth. This can yield some benefits to the shareholders.
Choosing the right business structure for your company comes down to several factors, the most prominent of which are liability, taxes, and your overall business goals.
One factor you’ll need to examine when deciding on a business structure is how much liability you can expect to have. Naturally, the higher the risks you’ll face during normal business operations, the more important it will be to reduce your own liability. For example, you might have a high chance of lawsuits or have to borrow large sums to build an inventory.
With sole-proprietorships and partnerships, you are fully responsible for everything your business does, so if you expect to assume large degrees of liability, these are probably not the best options. An LLC or full-blown corporation, on the other hand, will attach those liabilities to your business rather than to you personally. On the other hand, if you don’t expect to face many risks, a corporation may be a bit cumbersome.
Sole proprietorships, partnerships, and LLCs all share one factor-the owner are fully responsible for paying taxes on all income. Corporations, on the other hand, assume part of the overall tax liability. S-corporations are specially designed for this, in fact-you only pay taxes on what you claim as a salary. The rest is untaxed under the corporation as passive income.
It’s important to note that C-corporations may be subject to double taxation-once on the company’s income, and once again on that of its shareholders through the company. However, they could claim certain other tax benefits, such as those for disability insurance or cafeteria plans.
Finally, the type of structure you choose will be based on your ultimate goals. If your aim is growth and expansion, corporations are the way to go, especially C-corporations. If you’re keeping things small and simply want some livable income for yourself, an S-corporation could work, or you might stick with a sole proprietorship.
In determining your business’s structure, you will need to make sure you are fully compliant with the laws and regulations that govern it. Corporate lawyers such as us at Hart & David can help you set everything up correctly.