Review your business structure options
One of the most important things you need to do when setting up your business is to review your business structure options. The structure you choose will influence your taxes, daily operations, and risk. The key is to find an option that will provide you benefits & protection.
The liability protection and funding you need will play a significant role in your decision.
Here are things to consider:
Gain all profits, but responsible for all losses
When looking at your options, consider your personal liability. You can choose a Sole Proprietorship structure with the perks of gaining all the business’ profits. However, on the flip side, you would be responsible for any losses. There is no separation between business and owner under this structure. Consequently, the company has an unlimited liability that could extend any losses to your personal assets, like your home or car, if you can’t pay your bills or file bankruptcy. Nevertheless, sole proprietorships can be a good choice for low-risk businesses and if you want to test your idea before forming a formal company.
Types of business structures that protect of your personal assets
Another option is a Limited Liability Company (LLC) which connects you to the business but protects your personal assets. In this scenario, you are only responsible for up to the amount of your investment in the company. Another benefit for an LLC is that profits and losses pass through your personal income without facing corporate taxes. However, members of an LLC must pay self-employment tax contributions toward Medicare and Social Security. LLCs are a good choice for medium- or higher-risk businesses, owners with personal assets they want protected and who wish to pay a lower tax rate than a corporation.
Note that each state has different regulations for taxes for the IRS. So, factor in your state’s laws when looking into becoming an LLC.
A balance of benefits and risk
Partnerships is a great choice if you need a mixture of the benefits from the previous structures. Limited partnerships have only one general partner with unlimited liability. All other partners have limited liability. In most cases, the partners with limited liability have limited control over the company and must pay self-employment taxes. There are also Limited liability partnerships where every owner has limited liability.
The difference between a C Corp and an S Corp business structures
Your other choice is to register for a corporation, which gives you a complete separation from the company plus no personal liability. However, the cost to form a corporation (C Corp) is higher than other structures. Also, in some cases, corporate profits are taxed twice — first, when the company makes a profit, and again when dividends are paid to shareholders on their personal tax returns. Corporations are still a good choice for medium- or higher-risk businesses and businesses that plan to “go public” or eventually sell.
An S Corp is a particular type of corporation designed to avoid the double taxation that regular C corps can face. S corps allow profits, and some losses, to be passed through directly to owners’ personal income without being subject to corporate tax rates. Then the gain would only be taxed once on the owner’s individual tax returns.
Different funding options
Different business structures also have differing outlooks for growth and raising capital.
Corporations allow you to raise funds through the sale of stock. However, Sole proprietors and partnerships do not have this option. These business structures must apply for a business loan or credit finance to raise funds.
Review and Compare the different types of business structures
Take the time to do your research and compare the details of each structure so you can make the best decision for you and your company.
For additional information and guidance about business structures, visit https://www.sba.gov/business-guide/launch-your-business/choose-business-structure