It’s an exciting time when you’re starting a new business. Dreams are high, ideas are flowing, and you’re ready to go guns blazing. But are you taking all the necessary legal steps before you launch? Starting a business certainly tests your decision-making skills, and one of the most important decisions you’ll have to make in this process is selecting what kind of business structure is right for you. The structure you choose will not only have legal and tax implications, it will also impact personal liability and the potential to raise funds for your business.
Here’s a breakdown of the different kinds of business structures:
Sole Proprietorship
A sole proprietorship is the the most common type of legal structure. This type is an unincorporated business owned and run by a single individual who operates as the “business.” The sole individual is entitled to all profits and is responsible for all debts, losses, and liabilities. Freelance professionals are categorized as sole proprietors.
- Pros: easy to establish, complete control over business, easier to prepare taxes
- Cons: personal liability of business debts and obligations, difficult to raise funds, can be burdensome
Limited Liability Company
A Limited Liability Company, or LLC, offers the limited liability components of a corporation structure and the tax efficiencies of a partnership. The members that make up an LLC are not taxed separately; each member needs to report profits and losses and their own personal tax returns.
- Pros: limited liability, less paperwork, profit sharing
- Cons: less business security, self-employment taxes
Cooperative
People tend to form cooperatives to provide a service that benefits all members. Profits are typically shared among the members, also known as user-owners. Other members can become part of the co-op by purchasing shares. The industries that most commonly operate as co-ops are: healthcare, retail, agriculture, arts and restaurants.
- Pros: fewer taxes, better funding opportunities, never ceases to exist, democratic organization
- Cons: may have slower cash flow, lack of participation or low membership
Corporation
A corporation, otherwise known as a C corporation, is an independent business entity owned by shareholders. Corporations generally have more complex registration, tax, and legal requirements, and as such, are typically reserved for larger companies that have several employees. Corporations also have the ability to go public with their offering (IPO), which is an attractive point for business owners who are looking to receive large sums of investment capital.
- Pros: limited liability, easier to raise capital, corporate tax breaks, attracts quality employees
- Cons: costly, requires complex operations, lots of paperwork
Partnership
A Partnership is a business that’s shared between two or more people. The profits and losses are shared among each partner as well. There are three major types of Partnership businesses:
General Partnerships, Limited Partnerships, and Joint Ventures. Each of these types vary in terms of how profits, liabilities, and management responsibilities are shared and distributed, as well as how long a partner may be involved with the business venture.
- Pros: less expensive, shared responsibilities, complementary skills
- Cons: shared liabilities, lots of negotiations and compromises, shared profits
S Corporation
An S Corporation is unique in that it is formed through an IRS tax election. What makes an S-corp different than a regular Corporation is that profits and losses can be passed through to personal tax returns, which means the business itself is not taxed. However, any persons working for the company must pay themselves a reasonable wage, or else the IRS may reclassify any additional earnings as “wages.”
- Pros: savings on taxes, tax credits, can still operate independently if shareholders leave
- Cons: requires strict operational recordkeeping, “reasonable” compensation
There are a number of different steps and procedure that need to be completed when choosing any of these business structures. Be sure to check the specific regulations and guidelines for getting the right licenses and permits in your particular state, as they tend to vary.
We would be happy to walk you through these different structures. Connect with us today and get your new business off the ground.
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