So you are getting ready to form a business. This is an exciting time in your life, and you have a lot of decisions to make. Primary among them is the structure your business will take. You have six for-profit options: sole proprietorship, limited liability company (LLC), cooperative, corporation, partnership and S corporation. To decide which structure may work best, consider factors such as how many people are involved, income taxes, business type and liability.
Overview of Business Structures
A sole proprietorship is easy to form because it involves just one person as the owner of the business. The business owner is personally responsible for business assets, debts and liabilities. Filing taxes is relatively simple.A LLC features a large degree of personal liability protection, and filing taxes is fairly easy. An LLC may be owned by one or more people.A cooperative has less taxation (no taxes at the federal level), a democratic approach and perpetual existence. Members must participate as robustly as possible for success because the distinguishing factor of this business structure is it is formed to benefit the members. All members share in profits and the company is usually run by a board.A corporation is a fairly complex structure, usually reserved for larger companies. The company is owned by shareholders. There is little liability for owners because the business is considered its own entity. A partnership can be general, limited or joint. These are generally easy to form, but potential personal liability is an issue.An S corporation is somewhat like a regular corporation, but taxation is done on a personal basis.
Are You in the Business Alone or With Others?
If you are doing everything in the business alone, a sole proprietorship may be the way to go. You retain full control of the business and make four quarterly estimated tax payments throughout the year. Another option is to form as a corporation or S corporation. It comes with more costs and regulations, but an owner might pay less tax, have more protections for liability and have more flexibility to raise money. If you are forming the business with one other person, or a few people, a partnership may be a viable option, especially if you all are comfortable with the increased liability risk. Many people like partnerships because of the tax advantages, but one important thing to know about general partnerships is that all partners are held personally liable for business claims.A LLC tends to offer the best of many worlds, whether you go into business alone or with others. You enjoy limited liability, business flexibility, and streamlined taxes. However, different states have different rules for LLCs, so always check the laws of your state. A few states even say that an LLC cannot have only one owner.
Some business types come with more inherent risk than other business types. For example, construction can be more dangerous than an accounting job. If your business is of a type where liability can be an issue, you might be better off with a business form that limits your personal liability, which would mean no sole proprietorships or partnerships, for example.
Paperwork and Ease of Setup
If you want to get a business going immediately with little paperwork required, a sole proprietorship or partnership may be for you. With LLCs and corporations, you must file paperwork and articles of incorporation. You must also decide on procedural matters, such as company officers. Paperwork preferences aside, if your business carries a risk of liability, for example, such as window-washing tall buildings does, it is worth the time and effort to cover your bases and form a LLC or corporation.
If you anticipate the need at some point for outside capital or a public sale, consider forming your business as a corporation. You can sell stock to raise money this way. If you do not plan to raise money but like the idea of liability protection, go the LLC route.Your business structure can certainly evolve; the structures of many businesses do. For example, you might start as a sole proprietorship, move to a partnership and then a LLC, and finally become a corporation. Whatever structure you decide on for now, you are not stuck in that form.