One of the most important decisions you will make when you launch your business is choosing your business structure. It’s a choice you should weigh carefully, as the structure you select will determine how much you pay in taxes, the paperwork required and whether you will be personally liable for any obligations.
The structure that makes the most sense for you will vary by the needs and goals of your company. However, the following are the most common types of business structures and the pros and cons of each:
A sole proprietorship is perhaps the simplest and most straightforward unincorporated business structure, at least to start. If you plan to work alone, this will likely be the structure for you. You will include any income and expenses on your income tax form, and you have complete control over the business.
One disadvantage of this structure is there is no legal separation from you, your assets and your business assets. You will be personally responsible in the event of debt or a lawsuit, which could mean you are placing your assets at risk.
Another unincorporated structure, a partnership is a business owned by multiple people or other companies. All partners of the business will split any profits or losses and pay no income tax. Each partner reports the earnings of the partnership on their individual tax return.
However, as with sole proprietorship, personal liability is a significant concern. Each partner is personally liable for the debts and obligations of the business.
While there are a few different types of corporations, the C corporation is the legal entity that a vast majority of successful U.S. companies have. Typically, corporations are recommended for businesses that are more established, wish to sell stock in their company, have many employees or have outside investors.
As a separate legal entity from its owners, a C corporation must comply with more regulations and tax requirements. However, though it’s more expensive, a corporation offers some of the best protection from personal liability for its owners.
Limited liability company
For many, the limited liability company (LLC) structure offers the best of sole proprietorship and corporation structures. If you are worried about personal liability, an LLC will protect your assets from bankruptcy or lawsuits. LLC’s can also avoid corporate taxes and go through the individual tax returns of the owners.
LLC’s are more complicated to set up than a sole proprietorship or partnership, however. You’ll have to file articles of organization as well as an operating agreement that list’s the owner’s rights and responsibilities.
Choosing the right business structure is essential for the long-term success of your enterprise. If you’re not sure which structure is right for your needs, seeking expert advice from a business professional can help you pick the best option.