How to Form a Business Entity: Choosing the Right Structure for You
When you’re first thinking about starting a business, most of your attention is likely drawn to items like, “what should I name my company?” and “what products should I sell?” And while these are definitely worthwhile questions, it’s important to consider some of the more technical things about business startups as well. For instance, you need to decide how you will structure your business. While you can change this later, it is much easier to establish the structure as your company launches than try to implement it retroactively.
How you structure your business will have specific legal and tax implications, and will determine which income tax forms you file. You may wish to talk to a professional about your options to make sure you select the right kind of structure for your business type. Even so, it’s best that you go into the situation with some education. Here are the main kinds of business structures:
– Sole Proprietorship
– Limited Liability Company
What is a Sole Proprietorship?
“A sole proprietor is someone who owns an unincorporated business by himself or herself.”*
If you opt to structure your business as a sole proprietorship, it’s likely because you are the only owner of the company and the only employee. That is, you and you alone will be doing all the work for the business, usually out of your own home office. You would be responsible for any legal liability that could arise due to your business. And since your personal assets aren’t separate, they could be used to pay for these issues.
What is a Limited Liability Company (LLC)?
“A limited liability company, or LLC, is a business structure under which owners have limited personal liability for the debts and actions of the LLC.”*
An LLC is essentially a way to separate your personal assets from your business. This way, you are protected as an individual and won’t go bankrupt, no matter what happens with your company. Likewise, if your business is sued or faces any legal action, your personal assets won’t be a part of the negotiations.
What is a Partnership?
“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.”*
A partnership is the perfect way to protect multiple owners of a company. That is, if your business has more than one owner, you may wish to develop a partnership so that you’re all legally protected as a unit and from each other in case something unforeseen happens. Businesses can be of any size to merit this structure. Multiple owners are usually the deciding factor.
What is a Corporation?
“In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation’s capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.”*
A corporation is typically the largest structure you can pick. It’s designated for large companies with numerous shareholders. They also have several employees and usually offer a wide range of benefits for them. This offers the most legal protection for businesses that seek to provide a service or product on a larger scale and allows for rigid accounting. No personal assets are involved in a corporation.
Uncertain? Seek help. Think you’ve got it? Seek help anyway.
Regardless of how comfortable you feel about this decision, it’s still best to talk over these options with a professional before filing the paperwork on your own to make sure you’re making the right choice for your new company. By selecting the right structure from the start, you can be certain your company and your personal assets are protected in a way that best serves your needs.