What's the Best Structure for My Business?
When structuring your business, you should weigh your options carefully. After all, your structure will have a major impact on nearly every aspect of your business, from how much you'll pay in taxes to your personal liability. Unfortunately, many people come to this crossroads unprepared, not knowing the details of each business structure type or their respective advantages and disadvantages. That's why we've put this brief article together: to empower you to make the right choice for your business.
As a sort of hybrid structure, the limited liability company provides you with many of the advantages associated with both corporations and partnerships. Like corporations, LLCs protect business owners from liability due to bankruptcy, lawsuits, etc. But like partnerships, LLCs can be established and managed with a greater degree of flexibility. Because of this, many businesses considered medium- or high-risk go the LLC route, as do most business owners with substantial personal assets.
- Will protect you from liability, so your personal assets won't be at risk.
- Gives you the power to bypass corporate taxes as you move profits to your personal income.
- Can be started and managed with a high degree of flexibility.
- You will be considered self-employed and will be required to contribute to Medicare and Social Security via self-employment taxes.
- Depending on the state where you live, you may be required to dissolve or re-establish the LLC after a member joins or leaves.
- Some businesses, such as insurance companies, are not allowed to use the LLC structure.
Unlike the business structures already discussed, sole proprietorships aren't separate legal entities. Instead, they consist of individuals who start a business and take on all of the responsibility for debts and other liabilities. Establishing a sole proprietorship is as simple as registering your business name (it can be your legal name or a doing-business-as name) and obtaining any necessary licenses. There's no need for bylaws, articles of incorporation, or any of the other legal minutiae of other business structures. In addition, sole proprietors keep bank accounts in their own name and all income is taxed as self-employed income.
- Is the simplest business structure to form, requiring almost no legal hoops to jump through.
- Is the cheapest business structure to establish.
- Taxation procedures are much simpler.
- Places all liability on the business owner, including any debts and lawsuits.
- May have a more difficult time obtaining capital.
- Doesn't appear as “professional” to many people.
Incorporating as a non-profit offers some of the same benefits that other business structures offer, including liability protection. But since non-profits are generally focused on benevolence and they are afforded a variety of tax advantages. However, only organizations involved in industries such as education, scientific research, religion, and charity are eligible for non-profit status.
- Protects directors and officers from any liability that the organization may suffer, including lawsuits, debts, etc.
- Offers organizations the eligibility to apply for a host of public and private grants.
- Once it receives 501(c)(3) status, it will enjoy tax advantages such as federal exemption from corporate income taxes.
- Requires meticulous financial recording and on-time reporting due to its tax-exempt status.
- Non-profit status means your finances are a matter of public record, opening you up to far greater public scrutiny.
- For organizations that are struggling to get by as it is, incorporating as a non-profit can be prohibitively expensive and time consuming.
Partnerships are formed when two or more people establish a business that they take joint ownership in. This is the simplest business structure available apart from the sole proprietorship. In limited partnerships, one owner takes on unlimited liability while the others take on a more limited amount of liability. Limited liability partnerships allow all members to take on limited liability, protecting them from the actions of their partners. This is a great option for anyone who wants to test the waters with a new business idea before committing to a LLC or Corporation. It's also a good choice for certain professions that work in groups, such as attorneys.
- Allows new business owners to test out an idea with one or more partners, reducing his financial burden and offering additional hands and ideas.
- Requires minimal effort and paperwork to set up and maintain.
- Owners assume all liability for the business and its debts, potential lawsuits, etc.
- Owners are taxed individually and, as a result, pay higher taxes than they would with a Corporation.
Corporations, or C Corps, establish a legal entity that's completely separate from the members making it up. This allows you to enjoy the highest level of liability protection possible since all liability is tied to the corporation itself. However, this independence comes with a price: greater complexity in establishing and maintaining it. Shareholders also suffer from double taxation since corporations are taxed at the corporate level and then, individual shareholders are also taxed on any income they receive. With that said, corporations are the best option if you're looking to eventually expand or add shareholders.
- Offers maximum protection from all liability, so you'll never have to worry about your personal assets being in jeopardy.
- Give owners and shareholders the ability to raise funds via the sale of stock.
- Are more complicated to establish and manage, requiring more rigorous record-keeping and reporting.
- Leave shareholders with double-taxed income.