Fortunately, today’s entrepreneurs get the benefit of having valuable resources available to help them make strategic business decisions and adapt to the ever-evolving market. By investigating what resources are available from your local Chamber of Commerce or reading an online lifestyle magazine for startups, you can find guidance for key decision-making initiatives.
However, before you can get to that point, you need to take the first step toward becoming a successful entrepreneur: deciding your business structure. With so many options available and jargon-rich language making understanding a challenge, it can be hard to know what to do. Here’s how to find the business structure that’s right for you.
Understand the Various Structures
First and foremost, you need to understand the various business structures available to you. In plain English, these structures include
- Sole Proprietorship – this is the simplest business structure, in which your business is treated as an extension of yourself for tax purposes. That means your business taxes as your personal taxes.
- Limited Liability Corporation (LLC) – an LLC is similar to a sole proprietorship, but with the benefits of a corporation. This adds a layer of protection between your business and personal assets and liabilities. It’s the most common choice for solo entrepreneurs.
- Partnership – when your business is shared amongst multiple owners, a partnership shares the assets and liabilities of the business across the various parties.
- S-corporation – an S-corporation offers protection to all of those involved by creating separation between shareholders and the business entity. It allows for fewer than 100 shareholders and is taxed similarly to a partnership.
- C-corporation – a C-corporation is for larger establishments that wish to sell shares, go global, and ensure continuity. It adds protection for the owner, but also results in double taxation as both the business and those drawing income will pay taxes.
Sole Proprietorship vs. LLC
A sole proprietorship or LLC is right for you if you are a solo entrepreneur who will not be seeking investors or outside assistance. It’s simple to apply for and simple to dissolve if you choose to take another path in the future. If you’re outside the USA, an LLC is not an option.
An LLC adds a layer of protection to your personal assets if you’re worried about liability. If you’re working in an industry in which being sued is a concern, or if you plan on having outside contractors or employees, then an LLC is the best choice. With an LLC, taxation is still treated as a personal issue rather than a separate entity.
Partnership vs. S-corp
If you are working with business partners, you’ll want to decide between a partnership and s-corporation. An s-corp offers many benefits over a partnership. As both profits and liabilities are distributed evenly in a partnership without the added layer of protection of a corporation, you’re at risk if one of your partners does something fraudulent. With an s-corp, you’re protected from your partners’ liabilities.
On the other hand, an s-corp is more complex to manage than a partnership. You must apply for incorporation and receive a subchapter S designation from the IRS. This means having regular, documented board meetings that can be audited at any time. However, most partners feel that an S-corp is the smarter business choice for all involved.
A C-corp is only used if necessary for most startup businesses. If you plan on having over 100 shareholders or have owners from outside the US, you’ll need a C-corporation. With a C-corp, there is no pass-through taxation. That means that your business will be paying tax and you will pay personal tax on your income. You will not pay self-employment tax.
This guide should help you determine what business structure is right for you. Most people benefit from an LLC or an S-corporation, as they both offer simplicity and protection of one’s personal assets.