One of the first decisions you will make as a small business owner is your choice of business structure. How you decide to label your business will affect your day-to-day business operations, how much you pay in taxes, and the kind of paperwork you must file. The best structure for you will give you a balance of benefits and protections. Read on to discover the best business structure for your business and tax goals.
This is the most common type of business structure. A sole proprietorship means the business is owned and operated by one person. This structure is a good option if you want complete control of your business.
Your business assets and liabilities in a sole proprietorship are not separate. Sole proprietors include their business expenses and personal income on their personal tax returns because this structure does not produce a separate business entity.
However, this means that you are liable for the business’s debt, losses, and liabilities. If your business goes into debt, your personal assets can be at risk.
Two or more people own this business structure. The partners manage the business and are responsible for any partnership debts. Partners equally share all profits and losses. General partnerships let partners work as co-owners. It is wise to create a partnership agreement to lay out specific shares for each partner.
Any profits for a general partnership are taxed at the personal income level.
A limited partnership needs at least one general and one limited partner. Any limited partners serve as investors for the business and have no business decision rights. General partners will own and operate the business and assume liabilities for the partnership. The general partner has control and responsibility, while limited partners get ownership without the responsibility and risks.
C Corporation, or “C Corp”
A corporation is separate from its owners, and laws treat corporations as independent legal entities. This business structure will give you the most reliable protection from any personal liability. Corporations are the complicated business structure, however. This is a good option if you plan to expand your business or add shareholders.
Maintaining a corporation requires extensive recordkeeping and reporting, and you must comply with many regulations and tax requirements.
A corporation will also be double-taxed. Read here to learn more about how double taxation works.
S Corporation, or “S Corp”
This is a type of corporation where profits and losses are passed directly through to the owner’s personal income without being hit by corporate tax rates. The company shareholders must be U.S. citizens, and the S Corp cannot have more than 100 shareholders.
Only the owners, the shareholders, will be taxed. Double taxation for your corporation can be avoided by electing to operate as an S Corp through the IRS.
Limited Liability Company, or “LLC”
This business structure lets you combine elements from sole proprietorships, corporations, and partnerships. An LLC is a flexible business structure, which separates business and personal liabilities. All owners will have shared tax responsibilities.
An LLC will also protect you from double taxation, while still providing you with the liability protection that comes with a corporation. Another benefit to LLCs is that the owners are not liable for their business’s debts.
However, in many states, LLCs have a limited lifespan. You may be required to dissolve or reform the LLC if someone leaves or joins. Every state treats LLCs differently, which means that tax liabilities will vary, and you should check with your state for specific LLC regulations.
What to Consider Before You Choose
Before you choose your business structure, it is important to consider legal liability, taxes, costs, flexibility, and your business’s future needs. Consider contacting a small business advisor to help you properly register your business and get your small business journey moving.
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