After some seriously hard work, you’ve almost completely pulled your business together!
You choose a company name, you understand your market, and you’re ready to start pulling in some money.
But before you legally get started, there are a few things to consider.
Structuring your business is one of the first most impactful decisions you will make for your company as an owner.
Deciding the right structure can be confusing. Before you randomly choose a business structure, let us show you the basics.
In this article, we are going to go over the main business structures and what you need to know to choose the right one for your business.
Alright, let’s check it out!
Main Business Structures
Your business structure affects a whole lot of things on the operational side. As a business owner, choosing the right classification is super important to being a successful entrepreneur.
We are going to go over the main business structures and how they impact:
Taxes, Personal Liability, and Legal Paperwork Requirements.
To choose the best legal structure for your business, you must deeply understand your working industry as well as federal, state and local requirements. The most common business structures include:
- Sole Proprietor
- Limited Liability Company (LLC)
- C Corp
- S Corp
Each structure has pros and cons, we’re going to walk you through them.
1. Sole Proprietor
The Sole Proprietor is the most simple structure available. The owner has 100% full control of the entity in this case. In other words, “you are your business.”
The Sole Proprietor structure is built in a way that a single person is fully responsible for the company’s assets and liabilities.
Taxes: Taxation of the business goes through the business owner’s personal tax return. This is called a pass-through entity.
Personal Liability: As mentioned before, you are your business. The business owner takes full responsibility for liabilities in the business.
Legal Paperwork Requirements: For the most part, the paperwork required is minimal compared to the other business structures.
- Easy setup- most simple legal structure
- Low cost- varies depending on the state
- Easy to dissolve- breaking up your sole proprietor is very easy. Simply notify IRS as well as the state and local tax authorities.
- Full liability- Owner has full responsibility if things go wrong
2. Limited Liability Company (LLC)
An LLC is a so-called “Hybrid Structure” company. Why?
Glad you asked, an LLC allows owners to limit personal liability while enjoying pass-through taxation.
Taxes: Profits and losses pass through your personal income just like a Sole Proprietor.
Personal Liability: An LLC protects the business owner/s from personal liability (in most cases). For example, your personal assets won’t be at risk in the situation that your LLC goes bankrupt.
Legal Paperwork Requirements: There is paperwork involved in forming an LLC, but nothing out of proportion. There are also licenses that you must obtain (depending on the industry, state, and city your business is located).
- Fairly easy setup- Simple paperwork requirements
- Growth potential- Rather easy to get a loan
- Pass-through taxation- An LLC is a pass-through entity, meaning profits go directly to members
- Limited liability has limits- It is rare, but a judge can rule that the LLC doesn’t protect your personal assets. This is called Piercing the Corporate Veil and is very rare.
A corporation is an independent legal entity that separates itself from the owners. Forming a corporation is slightly more complicated than the other business structures mentioned.
We are going to look at C-Corps and S-Corps.
let’s check it out
This is the most common type of corporation. Shareholders purchase stock in the company and therefore own the corporation (Think public companies like Apple or Coca- Cola).
Taxes: A C-Corp is taxed twice, once when the company makes a profit and the second time when dividends are distributed.
Personal Liability: This business structure offers the strongest protection to its owners (the shareholders) in terms of personal liability.
Legal Paperwork Requirements: There is a good amount of paperwork to form and upkeep a C-Corp. This is because there is a lot of regulation.
- Limited liability- Very high protection for shareholders
- No shareholder limit- This means an unlimited number of investors can invest
- Unlimited growth potential- There is no limit thanks to the sale of stocks
- Double taxation- C-Corps are taxed twice, it is inevitable
An S-Corp is similar to a C-Corp when it comes to person personal liability, they too have shareholders. The main difference between the two is how they are taxed.
Taxes: The owners of an S-Corp take advantage of the pass-through taxation and therefore are only taxed once.
Personal Liability: Just Like a C-Corp, this business structure offers the highest protection.
Legal Paperwork Requirements: Similar to a C-Corp, there is a fair amount of paperwork to form and upkeep an S-Corp.
- Pass-through taxation- An S-Corp enjoys pass-through taxation
- Limited liability- High protection for management and shareholders
- High growth potential- Very easy to raise large amounts of capital
- Shareholder limit- Maximum of 100 shareholders, all must be U.S residents or resident aliens.
Compare Business Structures
We’re going to take a look at the DNA of these business structures and see how they compare.
This is a general comparison, it’s important to remember that ownership rules, tax, and legal paperwork for each structure may vary by state
|Business Structure||Ownership||Personal liability||Taxes|
|Sole Proprietor||single person||full personal liability||pass-through entity|
|Limited Liability Company (LLC)||one or more||owners are not personally liable||pass-through entity|
|C-Corp||one or more||owners are not personally liable||double taxation (corporate tax)|
|S-Corp||one or more (less than 100)||owners are not personally liable||pass-through entity|
Depending on the state or industry, you may need specific licenses and permits for your business.
Our article was written to provide general information about the main business structures available.
Choosing the right business structure should be taken seriously and you may need additional guidance (speak to your local CPA or Lawyer).
Check out these small business tools to help grow your business.