When starting a business, one of the most critical decisions you will make is choosing the type of business entity that best suits your needs. The structure you select can have significant implications for taxes, liability, management, and the future of your business. What should you consider when deciding which is best for you?
A sole proprietorship: a simple structure with unique risks
A sole proprietorship is the simplest and most straightforward business structure. It’s an unincorporated business owned and run by one individual with no distinction between the business and the owner. This simple structure comes with several different advantages. Sole proprietorships are often easy and inexpensive to establish. Owners also have full control over their company when forming a sole proprietorship.
However, this simplicity comes with downsides. Because there is no clear division between business owners and their company, they have unlimited personal liability for all the business’s debts and obligations. The business is also directly tied to the life of the owner, making business succession more complex.
A partnership: strength in numbers with a simple structure
A partnership is a business owned by two or more people. Like sole proprietorships, these businesses are often inexpensive to form and relatively straightforward. However, bringing in one or more partners allows those partners to pool both their skills and resources to fund the business and support its operations.
However, like sole proprietorships, this structure makes partners personally liable for business debts. In addition, adding a partner exposes the business to new challenges. Partners may disagree about the direction of the company or face challenges in sharing profits and work, and these conflicts have the potential to damage the company in the process.
A Limited Liability Company (LLC): protection and flexibility at a cost
An LLC is a hybrid structure that creates a clearer separation between owners, protecting them from liability in a lawsuit. LLCs also have greater financial flexibility because owners may choose to pay taxes as a sole proprietor, partnership, or corporation.
These benefits do come at a cost. By choosing an LLC structure, owners are also choosing additional costs and complexity in forming their company. These businesses can be more expensive to form than a sole proprietorship or partnership, and some states charge additional taxes or fees to LLCs. Owners must also navigate a more complex landscape of rules and regulations on the state level.
A corporation: managing complexity for greater protection
The corporation structure separates a business from its owners, providing the most protection from personal liability for its shareholders. This structure allows businesses to sell stock to fund operations. The company’s separation from its owners also means that it can continue operations if owners pass away or if they decide to leave the company for new opportunities.
Because the business is its own legal entity, however, corporations are also significantly more complex. These businesses can be more costly to establish and maintain, and they must follow many different business regulations during operations. In a C corporation, profits are also taxed both as corporate profits and as income for shareholders, meaning that you may pay more during tax season when selecting this business structure.
New Options for Business Owners
There are also more recent options, so you will want to consult an attorney to understand all of your options and the pros and cons of each.
Choosing a business structure for your company is a key step in achieving your long-term goals, but it is important to understand your options and have the right guidance during this process. Making an informed decision about your business’s structure can be the first step toward its future success.