Choosing a business structure is an important step for any business for so many differences. To start with, it will affect the taxes you pay, how you can receive funding, relevant paperwork, and personal liability. A business structure needs to be selected before you can go about establishing and registering your business. In some cases, you will need to get a tax number and apply for the appropriate licenses and permits.
Choosing the structure can be stressful as everything you do will be based on this. Some states will allow you to convert your business structure although different locations may have different restrictions. This conversion can cause so many different consequences if not properly managed. Having said this, let’s look at some of the common business structures.
This business structure is simple and provides full control to you as the business owner. This also means that your business and its assets and liabilities are linked to your personal assets and liabilities. You are liable for anything your business does as it is not seen as a separate entity. You can still apply for a trading name, although funding is tricky as you cannot sell stock and banks do not lend money to sole proprietorships. If you are looking to test your business idea, this is a good way to start.
When two or more people are looking to start a business, a partnership is the simplest way to go about it. Within this business structure are two kinds of partnerships, namely limited liability partnerships (LLP) and limited partnerships (LP).
Limited liability partnerships give limited liability to all partners and protect partners from the debts of the business while limited partnerships have one power with unlimited liability while all the other partners have limited liability as well as limited control. Limited partnerships have profits distributed through personal tax returns, with the unlimited liability partner needing to pay self-employment taxes as well. Partnerships are the ideal structure to test a business idea with multiple partners before formally making it a business.
Limited Liability Company (LLC)
An LLC incorporation gives business owners the benefit of both partnership and corporation business structures. This formation is popular because it protects business owners from personal liability, which means that if the business experiences any difficulties, your personal assets are not at risk. The LLC business structure makes the business a separate entity.
Corporate taxes are avoided as profits and losses are distributed through personal income. Self-employment tax, however, needs to be paid as members of an LLC are considered self-employed. The life span of an LLC may be limited in some states, as member movements can result in the LLC dissolving or having it reformed with a new membership. This can all be avoided if there is an agreement in place about ownership changes.
A corporation, or C corp, makes the business a legal entity that is not linked to the owners. Corporations can be held legally liable, be taxed, and make a profit. As a result, they offer owners the most protection although it costs a lot more to establish a corporation than any other structure. There also needs to be extensive record-keeping and reporting.
Corporations must pay taxes on their profits – sometimes even twice. This occurs when the profit is recorded and then again when shareholder dividends are paid. Shareholders can leave the business more freely without impacting the business. These businesses can raise funds by selling stock.
An S corp is also available and avoids double taxation on income. Some profits and losses can be distributed through the owner’s personal income without paying corporate taxes. This business structure has its own set of restrictions and guidelines that needed to be thoroughly looked at before implementation.
This business structure is less corporate and does not have the same formalities as other corporations or small companies. They cannot trade publicly and can be run by shareholders without a board of directors.
These are businesses dedicated to charity, literary, religious, educational, and scientific work. They have a tax-exempt status due to the nature of their work and will need to set up business processes accordingly.
When it comes down to it, the risk you are willing to take will determine your business structure. In addition to this, there are a lot of other factors that need to be considered. Once this has been done, you can start looking into registering your business.