Congratulations! You have decided to step out and start your own business. There are so many choices to make in the beginning and you are probably wondering where to start. Or you may have been in business for a few years and want to make sure that you are set up under the correct entity type.
One of the first steps in starting your business is to decide what type of business structure is best for you and your business goals. The structure you choose will affect the way you file and pay taxes, operate your business, and personal liability. There are five main business structures:
- Sole Proprietorship
- S corporation
- C corporation
- LLC – Limited liability company
Let’s dive a little deeper into each one so you can have a more clear understanding of which structure works best for you.
A sole proprietorship is one of the simplest and most common structures for entrepreneurs. It is an unincorporated business with only one owner, which is you. You do not have to register your business with your state. Also, there is no legal distinction between you and the business. You as the owner are entitled to all profits from the business. On the other side though, you are also liable for all debts and losses.
A partnership is a business owned by two or more people. This entity may be best if you are starting a business with someone else. Partners in a partnership share profits, operation responsibilities, and liabilities. Since there is more than one owner, there is always someone there to bounce ideas back and forth with.
S Corporations are corporations that pass income, losses, and deductions to the shareholders. In order to make an election to be taxed as an S Corporation, the business owner must form an LLC or be incorporated with their state. Once the LLC or incorporation is formed, the shareholder or shareholders, make the election to be an S Corporation. S Corporation shareholders and officers who perform services for the company are considered employees and must receive a W-2. There can be a single owner or up to 100 owners.
A C corporation is a legal entity that is taxed separately from its owners. It is independent of the owners/shareholders. This type of entity is best for larger, more established companies and is more complicated to set up. It is easier to get funding if your company is a C Corporation.
Limited Liability Company (LLC)
LLC is a business structure that is recognized at the state level. An LLC can be taxed as a sole proprietorship on your personal return, a partnership, S corporation, C Corporation, or Nonprofit. The LLC will protect your personal assets from bankruptcy and/or lawsuits. The LLC will be covered in more detail in each of the different entity types.
Starting your own business is very exciting and liberating. Choosing your type of business structure shouldn’t be what holds you back. Your business structure can evolve as your business grows. When determining which structure best suits you, keep in mind the main differences are taxation, liability, and maintenance. If you are still having a hard time with your decision, it is always best to consult with a professional.