So you are starting a business, Congratulations! Now what? Which business structure do you need and what does all this really mean?
In the United States there are five main types of business structures.
– Sole Proprietorships
– S Corporations
– Limited Liability Company (LLC)
The purpose of this article is to give you a little insight on options that are available. We will go over the different options and some pros and cons to help you prepare.
A sole proprietorship is an unincorporated business where there is no legal distinction between the company itself and the individual who owns it and runs it.
– Most popular/common form of business in the United States.
– Fastest startup option.
– Easy to start and manage.
– The company itself does not need to file taxes (Taxes are filed under the individual/owner).
– Low Startup cost.
– The owner has complete control over the business.
– Business can evolve into another structure type later.
– There is no difference between the individual and the company.
– taxes do need to be filed under the individual owning the sole proprietorship
– The Individual/owner is liable for everything the company does.
– Personal assets are not protected.
– Limited to one person. Once the business grows to more than one person it can no longer be a sole proprietorship.
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
– Require registration, but still relatively easy to set up.
– Share responsibility and profits.
– Requirements vary by state, but most cases it is a matter of filling out a form and paying a fee.
– Assume that the business is evenly divided or that specific percentages of ownership are documented.
– A limited partnership can limit both control and liability for specified partners.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations, and you should check with your state if you are interested in starting a Limited Liability Company.
Typically an LLC combines the ease of a partnership with the liability protection found in corporations. Owners of an LLC are called members. Most states do not restrict ownership, and so members may include individuals, corporations, other LLCs and foreign entities.
– Typically an LLC combines the ease of a partnership with the liability protection found in corporations.
– Requires a lot less record keeping than corporations.
– Provides some protection for the member’s personal property
– Fewer profit sharing requirements than corporations.
– Starting an LLC requires significantly more effort than forming a partnership.
– Depending on the state, LLCs may also have a limited lifetime. In some jurisdictions when a member leaves the LLC, that LLC is dissolved.
– LLC members will have to file additional forms for both federal and state taxes depending on the number of members, local laws, or even the LLC’s articles of organization.
– Often the members of an LLC pay payroll tax also.
A corporation is a separate legal entity from any natural person. Prospective shareholders exchange money, property, or both, for the corporation’s capital stock.
– Shareholders are generally free from personal liability.
– easily transferred compared to other business structures
– may sell shares to raise capital
– More difficult to start than other business structures.
– If records are not properly maintained, it is possible to lose the limited liability.t to form and maintain than the other options.
– may or may not pay lower taxes than individuals
– The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends.
An S corporation is formed through a special U.S. Internal Revenue Service (IRS) tax election and is specifically built to avoid the double tax problem with C corporations (above). The owners of an S Corporation still have limited liability, although not to the same extent as with a regular corporation, but pay taxes just once.
The S corporation has the same or similar record keeping and regulatory restrictions of a corporation, which can be a burden for some small retailers.
Which Structure is right for my business?
Unfortunately there is no generic template for every business to follow to make the right selection. The best option for deciding on your structure would be to review your needs and consult an attorney.